Five steps to set up your fid man contract

Why are you choosing this route?

Challenge yourselves as to why you have made this decision and how it will help provide a sustainable retirement income for members. Draw up a statement of what you expect to gain – this will include most of the following:

• An improved focus on self-sufficiency objectives;

• Speed and quality of decision-making;

• Effectiveness of implementation;

• Focusing limited capacity on areas that make most difference – fewer but potentially more important strategic decisions;

• Effective risk management;

• Better value for your spend;

• Improved support for your chosen approach from the sponsor.

The implications of investment delegation

Be clear on the nature and degree of delegation you are comfortable with and which best fits your preferred approach to investment governance.

• Areas to consider will include the following:

• Strategic investment advice;

• Liability hedge management;

• Portfolio construction;

• Hiring and firing of managers, perhaps including internal management of some assets by the manager itself;

• Monitoring and reporting;

• Tactical asset allocation;

• Dynamic derisking.

Your new approach may mean accepting a greater degree of conflict of interest and you need to be comfortable with this and how it will be managed.

Overall investment cost may increase, and you need to accept this as a possibility.

You will also need to consider the changes to your future investment governance approach.

Know the market

You then have to find out which providers can deliver your requirements and what advice you need in order to help understand what is on offer.

The market has developed over recent years and a range of approaches are available. Key differentiators include the nature of the company. There are four main types – consultancies, asset managers, specialists and multi-managers, all of which have a particular version of fiduciary management to sell.

Another key differentiator is the degree of flexibility offered and preparedness to allow gradual evolution of delegation, as is the in-house direct investment management. Different target client sizes and contractual approaches are also important.

The decision to move to fiduciary management is a major step and the cost of good advice will be small beer in this context, so trustees should not baulk at the price of such advice.

Go to market

Alongside your adviser, it should now be relatively straightforward to tender this appointment through a few key steps:

• Draw up a focused, relevant request for proposal specific to your scheme and its needs as determined in earlier phases;

• Agree a long list of potential candidates who will be a good fit with your requirements and assess their interest in the opportunity;

• Brief long-listed candidates and respond to their queries;

• Review and analyse responses;

• Draw up a shortlist for selection day;

• Run a selection day and hopefully agree a preferred candidate.

After selection

Having agreed on your preferred candidate, further due diligence will be required, plus contract and fee negotiations to carry out and references to take up.

There are many factors that need to be considered, not least your exit strategy in the event you change your mind about fiduciary management or wish to review the appointment in the future.

Finally, you need to consider how you will monitor the set-up when in place and what assistance you need to do this effectively.

This process should not be rushed – it is important to make the right choice for the right reasons. If trustees do not have the necessary market knowledge and capability to manage the process carefully, they should seek advice and support from an appropriately unconflicted source.

If the process takes time, then so be it. Untangling a bad decision will not be straightforward. 

Anne Kershaw is an associate director at consultancy Muse Advisory