Asset managers must 'rediscover' meaning of fiduciary duty
UK - A lobbying group has urged asset managers to be aware of their fiduciary duty to avoid potential conflicts of interest when investing on behalf of pension schemes.
The call came as FairPensions published a report into fiduciary duties of both pension trustees and those who manage scheme assets, arguing that many now only view a fiduciary's duty as guaranteeing returns.
In 'Protecting our best interests - Rediscovering fiduciary obligation', it also argued that investors should be aware of agency capitalism at a time when ever more complex financial tools mean asset owners need to rely on external investment advice.
It cited research showing that, in the five years to 2007, payments from schemes to intermediaries rose by 50%, while real annual returns averaged 1.1%, meaning more of the real returns were being captured by third parties, rather than being returned to the fund.
Christine Berry, author of the report, said that in light of this shift toward ever more external managers, it was important to stress that conflicts of interest should be avoided.
"Trustees and trustee boards are usually very aware of the potential for conflicts of interest to arise and that it needs to be managed," she said.
"Where that isn't necessarily the case is extending to the investment team, to the agents who act on their behalf - the asset managers and investment consultants."
Berry added that bringing the meaning of fiduciary back from only referring to maximising returns was also important if the above goal was to be achieved, and that there was a "need to rediscover" the fundamental aspects of the duty.
"We found that, unlike investment consultants, the asset managers seem to regard themselves as fiduciaries," she said.
"But when you drill down into what is meant by that, there is not necessarily a sense that it is about avoiding conflict of interest."
Berry cited research conduced last year that showed conflict of interest policy was one of the weakest areas of disclosure for many asset managers, which FairPensions believes is at odds with viewing themselves as fiduciaries.
Talking about the use of the Financial Reporting Council's Stewardship Code in this area, Berry said: "There is definitely a need for the FRC to place an emphasis on driving up standards when it comes to the implementation of those positions."
She also urged for the link to be reestablished between the importance of avoiding conflict of interest and an asset manager's duties.
Berry said misperceptions in the environmental, social and governance (ESG) investment field required clarification, namely that ESG was a choice rather than a requirement.
"There is still this lingering perception - even though there is a lot of acceptance that ESG is material to returns - that it is basically a client-driven ethical preference, rather than something that should be a fundamental part of financial analysis," she said.