Should schemes employ independent advisers to monitor fiduciary managers?

Shamindra Perera: There is great value in having the trustee advice piece and the fiduciary management piece separated out.

Patrick McCoy: Everyone in the market thinks it is critical, apart from a narrow number of consultants, and some are much more open to it than others. Some are being very mature and accepting that the market is evolving, and that different players have different roles, and that is absolutely fine. While others, quite frankly, are resisting it. It is a role that clearly should be there. Most of the providers think it adds value. And most people think that you can split the roles as well so you can do the strategic piece, and then you can do the implementation. So I think you will see more and more use of it.

Anton Wouters: The role of independent advisers is valuable, because they are very often the ones who can really challenge fiduciary managers in the right way.

McCoy: It also strengthens the relationship between the client and the fiduciary manager. So when the fiduciary sits down and says, ‘This is right,’ or, ‘We have done this,’ and then if the independent adviser can validate that, that strengthens the relationship.

If a client knows what they have bought from a fiduciary manager [then] if things go wrong they are more comfortable staying with it. So, good independent advice actually helps the fiduciary manager in their relationships with clients.

Christy Jesudasan: Yes, that is certainly our experience. The vast majority of our current clients use an independent adviser to support them in monitoring, challenging, and managing us.

In fact, we believe that one of the biggest risks in appointing a fiduciary manager is that the client and the manager assume the other party knows or understands certain things when in fact that is not the case. Of course, being cognisant of this risk we make a conscious effort to avoid this pitfall.

An independent adviser can further reduce this risk by adding the resource and expertise to help the trustee ask the right questions at the right time to monitor, challenge and manage us.

Jeremy Goodwin: From a legal perspective, it is fundamental to be able to demonstrate ongoing supervision of a fiduciary manager.

I have one of my clients, with a fiduciary mandate in place, that appointed an independent investment consultant to try and provide that supervisory function, and it is a nightmare relationship – they are constantly squabbling.

One of the real dangers out there is if you start to get too many advisers. It is necessary to make it clear what the function of each of the supervisors is, such as the investment consultant not just second-guessing the fiduciary manager, but actually being involved and saying whether it is outside the parameters of what is absolutely wrong.

Wouters: In the Netherlands, the big advisory houses have that kind of independent advisory role. They understand that they take on this role – as it should be – so we rarely see conflicting situations. Their questions are correct and appropriate in light of the mandate.

There needs to be a very clear governance structure to define what fiduciary managers are allowed to do and what the independent advisers are allowed to do.

Goodwin: The governance structure needs to go deeper than that as well, and it needs to go into the fiduciary manager because, again, the fiduciary manager, on the trustees behalf, will be entering into a whole series of contracts with the underlying fund managers.

Brian McCauley: These issues are coming out because we are learning them the hard way. But the clarity of roles should be up front, so [trustees need to know] ‘This is what my fiduciary manager is doing, this is what my monitor is doing. This is what my adviser is doing or my manager is doing.’ They have to know, they have to understand the fees and ask all the right questions. Working it out backwards is a lot messier than making it clear from the beginning.

Pensions Week: How involved should trustees be within the whole structure?

McCauley: Well, they have to be fully involved. Certainly at the beginning, and they cannot pretend there is not an awful lot of homework to do.

I think someone looking to appoint a fiduciary manager because it is more time efficient is choosing a fiduciary manager for the wrong reasons.

They have to do a lot of homework up front, get the parameters right, understand the roles, what everyone’s function is, make sure all the documentation is clear and the exit strategy is clear, how it is going to be reviewed, how it is going to be evolved, how it is going to be monitored, how it is going to adapt over time.

McCoy: The assumption is you do the work up front and it gets easier. Our experience is absolutely the opposite; the trustees spend more time – whether they want to or not I do not know – but they spend more time doing it with a fiduciary manager than they did prior.

Wouters: The difference is that you engage with the board of trustees about the strategic issues surrounding the pension fund.

It is more interesting for them as trustees because they get much more of a feeling that they are really steering the pension fund, instead of talking to an equity manager about details of the management of the equity portfolio.

It should be more interesting if you want to look at this from a strategic angle, but it is also more intensive.

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