Fiduciary managers need more competition
The review of the UK’s asset management market by the Financial Conduct Authority (FCA) may or may not result in tighter regulation of investment advice. But the regulator would do well to continue focusing on investment consulting firms that offer fiduciary management services.
The question is whether pension schemes are getting value for money when they switch from investment advice to fiduciary management services with the same firm. If the final report, due by the middle of the year, finds that competition is insufficient it should take action to remedy the situation.
Tim Giles, the head of UK investment consulting at Aon Hewitt, compares the disruptive potential of fiduciary management with the impact that Uber is having on the taxi industry. Uber’s alleged unfair competition has prompted protests and legal action in many countries.
The Uber analogy might seem far-fetched. Uber drivers are individuals who are seeking to make a living. Fiduciary management businesses, particularly those run by huge multinational firms, are complex operations that need to invest millions in infrastructure and expertise.
Nevertheless, the parallel works in terms of the disruptive potential of the fiduciary management model. Fiduciary management is about specialisation of skills and resources. Pension schemes, especially small ones, cannot afford the skills or resources to manage even small portfolios in the complex investment and regulatory environment of today. Fiduciary managers offer the expertise and infrastructure to fill that gap.
There is no reason to slow down this development, regardless of whether it affects asset managers’ profit margins. However, the FCA should take action to create a more competitive environment. At present most of the fiduciary management market is controlled by a few firms.
Better competition could be achieved by requiring open tenders for pension funds that want to switch from traditional advice to fiduciary management.
Giles’ analogy works on another level. Uber epitomises the ‘sharing economy’, a term that has been widely criticised. Critics point out that consumers have to pay to a platform that provides access to the service on top of the benefit they wish to access. There is little sharing involved. In time these privately-owned, profit-driven platforms should proliferate to ensure competition and a better market outcome.