That the Competition and Markets Authority has found evidence that most pension schemes look to their existing consultant when appointing fiduciary managers will surprise few, writes IC Select’s Roger Brown, but only one of the watchdog’s four remedies has the potential to change the industry for the better.
We are not surprised by this result. This flipping from advisory to fiduciary services has been prevalent for years, although we also believe the practice has declined of late.
Every time IC Select has run a selection process for a fiduciary manager, where the current adviser is favoured, the incumbent starts with a clear advantage.
If we take the word of consultant firms that advice is given in the clients’ interests and not in the interest of their own profitability, this will surely make no difference to recommendations to switch to fiduciary management
This comes from the existing relationship between adviser and trustees and, more importantly, because over the previous months, the trustees have been introduced to fiduciary managers at the firm and received presentations on their approach.
I would compare it to a 100-metre race where the incumbent starts 25 metres down the track.
Mandatory tendering won’t work
If the CMA concludes this is a competition issue, it has suggested four broad remedies: first, regulators could make tendering mandatory, possibly with the requirement to use a third-party evaluator; second, it could require trustees to report to their members or the Pension Regulator on their tender approach.
Third, an advisory consultancy business could be separated from its fiduciary management businesses and, finally, marketing of fiduciary management could be separated from advisory work, possibly with the introduction of a time gap.
In my view, the first of these remedies, introducing mandatory tendering, would not impact on the advantage the incumbent firm has at the outset.
Even with mandatory tendering – whether a third-party evaluator was used or not – the incumbent firm would have been able to presell their version of fiduciary management to trustees.
This first-mover advantage, reinforced by the existing relationship with the client, would create a significant advantage. The incumbent firm would still be starting the race 25 metres down the track.
Members and regulators may not scrutinise reports
As with the first remedy, requiring trustees to report to their members or the regulator would make little difference. It is difficult to imagine any of the members being sufficiently exercised by a selection process to create genuine challenge to the trustees.
And we would expect that, if the regulator did receive a report, it would concentrate on checking that an effective tender process had been carried out, rather than that the race was completely fair.
Forcing firms to separate their investment advisory business from their fiduciary management would certainly remove any competition issues.
However, separating the advisory and fiduciary businesses would also require dividing the strategic asset allocation, tactical asset allocation and manager selection research engines between the two businesses.
This would significantly weaken the ability of large advisers to provide services to their existing advisory and fiduciary clients. No wonder some smaller consulting firms that struggle to compete with large research engines are calling for this solution. If implemented, the demerger would make them more competitive overnight.
The CMA has already said that it must consider whether any solution causes harm to existing clients. This kind of separation surely would.
Refocus advisers on clients’ interests
Prohibiting a firm from acting as a fiduciary manager for a client for, say, six months after the termination of an advisory contract would solve competition issues far more effectively. It would also prevent, or undermine, the marketing of fiduciary services by incumbent advisers.
The time gap does not have to be long. Once a fiduciary manager had been appointed, it is unlikely that this will be retendered for several years, by which time any advantage of the former advisory firm will have eroded.
Trustees lack info to judge fid man and consultant VfM, finds CMA
Competitive processes are not providing customers with the necessary information to judge the value for money of investment consultants and fiduciary managers, the Competition and Markets Authority has said.
The downside of this remedy is that advisory consultants may be less likely to recommend a fiduciary approach because it would be impossible for their firm to profit from the change.
If, however, we take the word of consultant firms that advice is given in the clients’ interests and not in the interest of their own profitability, this will surely make no difference to recommendations to switch to fiduciary management.
Roger Brown is founder and director of oversight specialist IC Select
