How do you monitor fiduciary management performance?

William Parry

One of the things that people always ask us is, ‘Can you please compare the performance across the market’, and it is really tricky to have that snapshot of performance. Actually most of it relies on knowing the managers and the softer side of it.

Tony Hobman

But then you would expect someone – maybe an independent evaluator who was used to and knew about the importance of looking for those things, and had some insight into that – to add real value.

We hear from the market: ‘Oh, we cannot give performance because it is all so bespoke.’ Take that with a bucket of salt.

Neil McPherson, Capital Cranfield

Mark Davis

We tend to help our clients to consider a balanced scorecard-type of approach, blending the numerical facts with qualitative factors. For the more easily measured pieces, areas such as performance and risk are clearly key, summarising how the provider is actually doing relative to the objective that was set.

Clients specify something very precise in their legal agreement and have said, ‘This is what we would like to achieve within these particular constraints,’ so we report on how well or not that has been achieved, enabling challenges from a proper outside intermediary. We then blend this assessment with all the other qualitative aspects that are really important as well.

Whether that is the quality of the strategic advice that has been given, the interaction in meetings, the quality of client service, whether the operational aspects have all worked smoothly; all of those other softer factors need to then be factored in and balanced alongside performance.

Neil McPherson

A link to liabilities and performance is crucial, which is why the traditional ad valorem basis plus a performance fee is not a popular model. It is just a growth of the manager of managers; we had manager of managers in the wealth market but look what has happened now, ‘Okay, we will transfer that; spin it round, call it fiduciary management for the pension market’.

The big difference is liabilities, and that has not been addressed yet; it ties back to what we hear back from the market: ‘Oh, we cannot give performance because it is all so bespoke.’ Take that with a bucket of salt as well; it may be bespoke at the billion pound plus, but it is not bespoke for a twenty-million-pound fund.

It is still a perfectly good and suitable product, particularly given the governance resources available for the scheme, but it is not bespoke in that respect and it does not necessarily need to be bespoke if the objective is derisking. Also very important is what discretion they have.

Sarah Leslie

There have got to be the decisions that are owned by the fiduciary manager and the decisions that are owned still by trustees, with the sponsor, and being very clear about where those lines are drawn so that you are not taking credit or being penalised for decisions that do not sit within your remit.

What we are seeing and discussing a lot more now is performance-related fees on the more qualitative aspects, so on the relationship and soft areas, because ultimately my response when asked by clients about performance fees on more qualitative aspects is, ‘You trust us to look after your scheme assets ensuring your benefits can be paid. In the same way I should trust you to make a fair assessment of how well we are providing a service to you; and if you would like a performance-related fee that is based on those soft metrics, at the end of every year we can sit down and say, here is a sliding scale, have we delivered on that? Whereabouts do we sit on that, and that is the fee that you pay.’

Focusing on investment performance as hard-coded numbers is one of those challenges we have created for ourselves because, actually, there is a much broader remit than just performance. Risk for instance: how did I avoid the massive fall when everybody else fell off a cliff?

Parry

Some trustees are really looking for an arm around their shoulders and some are not; one of the ways we try to categorise the manager is, rather than use the legacy business of consultants or asset managers, is put them on a scale of how collaborative they are. Some fiduciary managers will want to sit down and talk through everything as an educational process, and they will really want the trustees to buy into what is happening.

At the other end of the spectrum you have fiduciary managers that want to be given the instructions and then left to go and fulfil those instructions as they see fit; they do not want to put an arm around the shoulder, they want to report once a quarter. That is fine, they want the autonomy, whereas others really want it to be a process fully involving both parties.

Rikhav Shah

When I sit back and look at what fiduciary managers are providing versus others, I think the fiduciary managers are providing much better information on performance.

We start off sometimes looking at a selection exercise and we look at things like costs and speak to trustees and say, ‘Do you understand exactly how much your current arrangement is costing?’ And we do get some surprises; we see a lot more breakdowns in terms of performance and a lot clearer attribution, for example.

Actually, it has been a very nice experience from that perspective for some clients who have gone into fiduciary areas; I think there is quite a lot of work done by the fiduciary management industry that can be applied to the wider pensions industry.