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Impact Investing

IPE special report May 2018

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Appeasing the gatekeeper

Last year I attended a drinks reception organised by a UK consultancy. The event was arranged specifically to allow the firm’s staff to meet with the asset management community. The theme running through the opening remarks was simple: “We have no current or future plans to offer fiduciary management, therefore we will never compete with you.” There was also a short but sincere thank you speech. The consultant expressed his thanks to asset managers that recommended his firm to pension fund clients. “Hang on,” I thought to myself – usually it’s up to the asset managers to thank consultants for clients. Furthermore, I was led to believe that consultants were the gatekeepers. So what were a bunch of asset managers doing recommending a consultant to a client? If a bouncer is refusing you entry to a club, good luck asking him to speak to another bouncer, I thought. 

I do not know the details of the story, and anyhow, no apparent harm was being done. But I wonder whether the candid attitudes of the above speaker would be of interest to the UK’s Financial Conduct Authority (FCA), as it pursues its study of the asset management market.  

The FCA has engaged in a comprehensive review, which could unearth evidence about dubious practices in the market. The FCA would not have instigated the review if it did not have good reasons to think that those dubious practices were indeed already taking place, even if on a small scale. I challenge anyone to dispute that. 

Let me be absolutely clear: there is nothing inherently wrong with consultants thanking asset managers for saying nice things about them. The FCA has much bigger questions to ask. For instance: are investment consultants that offer both traditional advice and fiduciary management services conflicted in advising clients to move towards full delegation? Do traditional advice firms that charge by the hour have a tendency to advise asset manager changes too frequently?

Traditional advice firms may feel the FCA is finally doing them some justice by scrutinising consultants that offer fiduciary services. But if the regulator wants to do a proper job of assessing how value for money is delivered, it should spend time looking at both kinds of firms. 

Hopefully the FCA will find no evidence of improperly managed conflicts of interest, or worse, that they have a tangible impact on clients. But if that is the case, the institutional investment advice industry has to answer. 

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