How can schemes ensure they get impartial advice?

Increasingly, the traditional investment consulting firms are also offering asset management services (and asset managers are offering investment consulting services). 

This issue of conflicts in the investment consulting industry has been around for a while. It has received more prominence as a result of consulting firms growing their fiduciary management practices and promoting this more heavily. 

However, it is not only an issue when considering the fiduciary management services offered by a scheme’s existing consultant; trustees should be mindful of the potential for conflict whenever an adviser is recommending a product or investment that is associated with their firm.

Trustees should be mindful that third-party consultants will have their own potential conflicts, particularly if they are being asked to review a competitor’s product or advice

Further light was shone on the issue when the Financial Conduct Authority started its year-long competition market study in November 2015.

Part of the study is looking at the way advice given by investment consultants affects competition for asset management and how conflicts are managed in the business model of investment consultants. 

So how should trustees react to this and how can they ensure they get impartial advice?

Were alternative products considered?

It is worth noting that even where a consultant is acting in a conflicted position, trustees may still be getting recommended an appropriate product at a competitive price.

The key issue for trustees in this situation is being aware of and understanding the conflict and the effect it may have on the advice they are receiving. When faced with a conflicted consultant, trustees should ask themselves the following questions:

• Would my consultant have advised the same way if they were not conflicted?

Would an independent consultant have recommended the same product or investment in the same circumstances?

Trustees should speak with their consultant about what alternative products were considered prior to delivering their advice and why they were ruled out. Does the investment consultant’s house view influence the product or drive our investment beliefs towards it?

This is often difficult for trustees to assess, but consulting firms typically have house views about investment strategies for pension schemes, and their asset management arms design products that suit the house view. 

Trustees should be mindful that their own investment beliefs may be influenced by their consultant, which could, in turn, make certain products appear more aligned with the trustees’ strategy.

• Are the fees offered competitive and appropriate?

Trustees should be comfortable that they are paying appropriate fees for the services they are receiving. When a consultant is recommending an in-house product, trustees should confirm whether the advice has taken into account fees charged by similar products from other providers, including any discounts that could be achieved.

• Can my consultant provide robust monitoring of an in-house product?

In order to protect themselves from liability, trustees must take all reasonable steps to ensure managers are carrying out their work competently and in accordance with legislative requirements. 

Trustees should ensure they are comfortable with their consultant monitoring their own firm’s performance and compliance with the law. 

Member claims could follow

Asking these questions of an investment consultant the trustees have worked with for a long time can be difficult. 

However, trustees need to be aware that by not considering and managing the conflicts, they could be exposing themselves to claims by members. 

Trustees can often benefit from third-party input from either their lawyers or actuary in these discussions to ask the difficult questions. 

If they are not happy with the answers, or do not feel their concerns have been adequately addressed, trustees should consider whether taking investment advice from a third party is appropriate. 

Advice from a third-party investment consultant can be a useful way of validating the recommendations of an existing consultant, for example that fees are competitive and the investment or product offered is appropriate. 

Trustees should be mindful that third-party consultants will have their own potential conflicts, particularly if they are being asked to review a competitor’s product or advice. 

As such, it may never be possible for trustees to get truly impartial investment advice in a market where there is an increasing blending of consulting and management services. 

Mark Latimour is a partner in law firm Eversheds