Six test points for comparing fiduciary managers

There are many variations of fiduciary management – from a full delegated journey-plan approach, to partial delegation of only part of a portfolio.

So how should trustees select a fiduciary? 

There are six areas that need assessment, whatever the background of the provider.

Ownership

It is important to know exactly who you are transacting with. What recourse to any parent company do you have if anything goes wrong?

Although your manager may be a subsidiary of a large group, would liabilities be limited just to the subsidiary company?

Size isn’t everything. How does your scheme fit within the manager’s business? Do you want to be a large fish in a small pond?

Also, you need to consider if you want a standard or scheme-specific approach.

While the focus of any manager search is about identifying who you want to do business with, it is worth reviewing what would happen if you wish to part company.

Understanding the manager's process in this area, the quality of their economic inputs and how frequently positions are reviewed and changes made, will ensure trustees can assess the potential for added value

Whether there contract lock-ins, how easily assets can be transferred and how much it will cost, all need to be understood.

From a tax-efficiency perspective, it is important to know how any account would be structured (life company, segregated account or other pooled vehicle).

Strategy management

The setting of strategy and any flightpath is vital to success.

It is essential to be clear about how this is done, who does it, how they will work with the trustees and the amount of input the trustees and sponsor will have.

Reporting and monitoring of progress is an essential measure, as is the frequency of trigger monitoring.

Understanding the timescales required to establish and periodically reassess the flightpath is also useful.

Speed of implementation

One of the big attractions of fiduciary management is the speed with which decisions can be made and implemented.

Trustees should look for evidence of how successful this has been in the past.

Can the manager demonstrate successful activity in strategy, tactical allocation and manager selection?

Tactical allocation

While strategy remains the most important facet of investment work, significant value can be added through tactical allocation.

Understanding the manager’s process in this area, the quality of their economic inputs and how frequently positions are reviewed and changes made, will ensure trustees can assess the potential for added value.

Evidence of value added through past tactical decisions can be strong proof the process works.

Manager allocation

Selecting the best managers to implement strategy is the last ingredient in the investment mix.

Trustees need to understand the research process undertaken in choosing them: who does it, how often are reviews carried out, and how often are changes made and why?

Once a change is decided upon, how quickly is it implemented? Can the fiduciary manager demonstrate examples of change, the speed of implementation and value that has been added?

Fee transparency

There should be a clear separation between the fiduciary manager fees, underlying manager and custodian costs.

Trustees should ensure any savings made through changes to strategy (eg moving to passive management), or additional discounts with underlying managers are passed on, not kept in the pocket of the fiduciary manager.

Asking for examples of fee discounts that the fiduciary manager receives from managers is a good way to check.

John Finch is director at JLT Employee Benefits