The convergence between asset management and consultancy was a topic for discussion at a conference on fiduciary management organised by the German Federation of Financial Analysts and Asset Management (DVFA) in Frankfurt last November.
In two panel discussions, asset managers and consultants offering fiduciary management services were set against each other to determine which is better. However, the debate demonstrated that there is no one unified concept of fiduciary management in Germany, let alone a ‘product’ that can be sold.
According to Tobias Ripka, principal at Mercer Germany, the current share of German institutions using fiduciary management is “well under 10%, probably even below 5%”. But he concedes that the figure multiplies if some advisory mandates “close to delegated consultancy” are taken into account. “Large CTAs in particular are outsourcing a lot, and in this category we can see up to 20% or 30% looking for support,” he says.
“Outsourcing all decisions to one provider would be the master class, but most investors looking into fiduciary management for the first time are ‘only’ using certain modules and partial solutions,” adds Markus Taubert, managing director at BlackRock Germany, who was seconded by Torsten Köpke, head of Aon Hewitt’s investment consultancy in Germany. Köpke also mentioned time to market as a factor for delegating investment decisions, as a single party can decide more quickly than an investment board.
The classic fiduciary management marketing pitch, honed over many years in the Netherlands and increasingly in the UK, emphasises that institutions do not lose the power to make any decisions; they are “just making them at a different point in time” as Köpke puts it, mandating certain people to act in a certain way when a specific event, such as an interest-rate trigger, occurs or when a market opportunity arises.
Sabine Mahnert, senior investment consultant at Towers Watson in Germany, says clients who might be familiar with the concept of fiduciary management, for instance from Dutch or UK subsidiaries, are asking for similar solutions in Germany. “For us, fiduciary management is only one possible solution alongside other more classic advisory mandates,” she says.
But the trend has not been a big deal for fiduciary managers. “There is no massive wave of fiduciary management mandates in Germany,” Taubert notes. “Discussions like this make it look like it is much more of a trend than it is.”
Indeed, the term fiduciary management has lacked resonance in Germany. In general, the idea of outsourcing all investment decisions to one single provider does not sit well with institutional investors when the trend over the past decade and more has been towards breaking up the value chain.
Uwe Rieken, founding partner and managing director of Faros consulting, the only consultancy in Germany to actually use the term ‘fiduciary management’ in its brochures, is one of the proponents.
“Fiduciary management is a trend that cannot be stopped but it is always implemented with a back-up,” he says. His consultancy has three full fiduciary management mandates and several others totalling €600m, in one case acting as fiduciary manager for the equities portfolio of a Versorgungswerk where bonds are managed in-house. Rieken predicts stronger demand for similar services in alternative assets. “Fiduciary management can fundamentally change asset allocation,” he says. “For example, infrastructure is an investment we can help make decisions for which an investor would take much more time on his own.”
Although Mercer is responsible for assets totalling €75bn in fiduciary management, according to IPE’s October 2014 Investment Solutions Survey, the firm does not offer the service in Germany. Herwig Kinzler, principal at Mercer Germany, believes domestic institutional investors will not opt for a full fiduciary solution, although they will increase the use of modular approaches. “You cannot devote 90% of your time to 10% of your portfolio,” he says, with reference to the time required to manage due diligence-intensive assets. Large investors in particular will continue to manage equities and bonds in-house, he believes, while smaller investors will mainly delegate investment choices to master KVG structures.
Towers Watson’s delegated investment services account for €46bn in assets, according to IPE’s October 2014 survey. “Now the investment universe is much more complex, as is the regulatory environment, and investors are looking for someone to help ease the burden,” says Nikolaus Schmidt-Narischkin, Towers Watson’s director of consulting services in Germany. For that they are willing to pool assets and responsibility with one or more service providers, he says.
Others agree with that view. Joachim Meyer, managing director at Meyer & Cie Allokationsberatung in Munich, does not see demand for full fiduciary solutions, while BlackRock’s Taubert believes that fiduciary management is mainly attractive for alternative portfolios and absolute-return mandates.
Volker Brandt, senior consultant at RMC, which has decided not to offer fiduciary services, sees fiduciary approaches as part of the larger-scale convergence between asset management and consultancy, albeit with fees more indicative of asset management than pure consulting. Aon Hewitt, Mercer and Towers Watson all offer delegated consulting or fiduciary management services, largely in the UK, while a large number of asset managers have a dedicated solutions unit.
Casper Hammerich, senior investment analyst at the Copenhagen-based pure-play consultant Kirstein, thinks asset managers in particular “should stick to their guns and carefully consider their value propositions before taking on additional business areas”.
Conflicts of interest can also be problematic, according to Marcus Burkert, managing director at Feri Institutional & Family Office. “The one doing the ALM study is also the one choosing the managers, controlling the process and in many cases delivering asset management-linked services,” he says. “This is a major issue.”
Feri decided against offering fiduciary management services several years ago and separated its consulting and asset management related activities into two business lines. Nowadays, Feri is appointed as a controller in fiduciary mandates. “In cases such as a large company with several different pension plans there is a certain charm in finding someone to take care of all the recurring challenges,” Burkert says.
Most consultants, particularly the international ones, offer some form of asset management services. Brandt at RMC says his firm would terminate a mandate if a client hired a fiduciary manager, because he believes responsibility cannot be divided between several parties.
Some clients allow asset managers to enter their own strategies in the preliminary selection process for fiduciary management mandates but requirements and mandates differ greatly from client to client.
While asset management providers have been building up their know-how in the area of liabilities, some point out that consultants lack a significant track record in asset management. Squaring the circle, many asset managers may need to work with third parties, including consultants, in the area of manager selection where third-party providers are required.