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Impact Investing

IPE special report May 2018

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Accountants on fast track

“Anarchy and competition are the laws of death,” said John Ruskin. As the major accountancy firms move into the fields of actuarial and investment consultancy for pension funds and institutional investors, are we about to see a fight to the death with the existing dedicated consultancy firms?
The answer to that rather depends on how we view competition in these areas.There is an argument which suggests that the firms are really in competition with one another, as they develop these new service lines. This suggests that the work is developing from existing business and clients, and so traditional rivalry is the spur to increased fees. This is not necessarily the whole picture, however, and there is little doubt that firms are keen to develop independent actuary and investment consultancy practises within their existing structures, and encourage the search for new clients.
Frank McKay, head of pension services at in major accountancy group KPMG in Birmingham, says “Pension and actuarial services at KPMG are businesses in their own right, but clearly we work with other departments and our consultants. Nevertheless we have to stand on our own feet looking for new clients, but inevitably working with existing clients too.” He believes that his major competitors are the existing actuarial consultancies, but adds that accountancy firms are the fastest growing providers of actuarial and investment services in the UK. “We are also looking at the global development of this part of the business, and giventhat we trade as one-name firm across Europe, we believe that we can offer new services in a very competitive manner.”
So do accountancy firms offer something extra to fund managers and trustees? McKay believes there is no reason to compare like with like, and that the firms services should not be compared directly with the major dedicated consultancies.
Paul Haines, who recently left the investment advisory practice of Price Waterhouse Coopers in London to join actuarial firm, Lane Clark & Peacock believes this may be a naive view. “It is probably true to say that the service they provide does not have to be better, on the one hand, but if you are not a specialist in a particular area there is clearly a requirement to offer an enhanced service if clients are to be lured away from their current provider. What is more pension fund managers looking for actuaries, for example, do not immediately think of the larger accountancy firms, unless they are already a client. Far more likely is that they would immediately refer to a pool of half a dozen or so specialist consultancies,” he said. “However, it is often imagined that actuaries compete with actuaries and the accountants with accountants, but that is not always the case. One must look at the kind of business and its size, as well as the firms perspective. This applies to dedicated firms as well as the accountants. Each company has its own niche which it is trying to develop, and prospective clients should always take that intoconsideration.”
Haines believes that the accountancy firms originally created actuarial elements within their operations primarily to support existing clients, rather than in an attempt to create a new market. “For example where they were doing mergers and acquisition work, naturally pension arrangements are part and parcel of this, and if there is no department to advise an outside consultant must be brought in. Actuarial expertise, on the other hand, would come via insurance work. Finally if we think of employee benefits we only need look so far as human resources advice.”
Once that expertise is in place, however, Haines believes it is inevitable that the companies would begin to look for mainstream work. “This is relevant for recruitment within the accountancy firms themselves, as they will find it difficult to attract the right people if there are restrictions on the kind of work they can do,” he added.
Tim Roff at Ernst & Young in London picks up this theme. “Although we view other similar firms to our own as natural competitors, the dedicated firms already in areas such as actuarial and investment consultancy are clearly on the same battleground. But I believe the accountancy firms hold an advantage, provided they show a commitment in these new areas. This means recruiting the right people to attract the clients. In the past some firms have not got their strategy right, but at Ernst & Young we intend to buck that trend and compete with the specialists. Consultancy is a “people business” and by recruiting and promoting the best people, we will really be promoting theservices we offer,” he said.
Roff points out that the competition between the major accountancy firms may well drive their developing interest in specialist services. “There is a great deal of competition between the larger firms on high profile issues such as gross fees, and everyone is looking for new service lines which can grow quickly. Furthermore, as some high-fee earning departments such as management consultancies are spun off into their own companies as a result of independence considerations, new services will have to compensate for fees lost.”
Such growth may not all be organic, says Roff, implying that takeovers and mergers may be ahead.
These comments raise two more important issues, pan-European growth and conflict of interest considerations.
The major accountancy firms have followed a globalisation strategy in recent years, often mirroring the growth of their clients. This enables them to develop systems and share them on a cost-effective basis. Roff believes there is no reason why new service lines cannot be put in place across Europe at very low cost, creating services where they did not exist before.
On conflict of interest the final word goes to Haines. “Most professional firms offering a number of service lines have some kind of conflict of interest. Some areas are covered by legislation, but otherwise it is a question of the client or trustees being aware that the firm is advising on one or more issues. The doctrine of conflict of interest does not mean that the advice is compromised, but merely that such conflict exists. The question then is how it is resolved. One can normally rely on individual professional standards, but at the end of the day the client has the final say.”
By having the final word the clients can ensure that this particular outbreak of competition leads to a more dynamic and customer-friendly marketplace, rather than to the demise of some famous names. Kevin Hall

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