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Blurring of the advisory lines

Pensions consultancy in Europe is changing. Not only are many asset managers and investment banks moving into advisory roles, but consultants are also blurring the lines by offering investment products.
Steve Aukett, director of Strategic Solutions at Schroders, says that right now asset managers and investment banks offering advisory services are more concerned with working alongside consultants than competing with them. But the overlap that is now occurring, is likely to widen.
“The lines will probably become more blurred in the future,” he says. “But I don’t think that’s to the detriment of the client.”
Some of the best brains in the pensions and investment management industry have been working on ways to solve the funding crisis, and this has rattled out the best ideas and there has been a refocusing on strategy, Aukett says. “Attention in the industry has moved from the minutiae of what stocks you buy, to investment strategy,” he adds.
There will be healthy competition between the parties in the pensions industry, but right now the end user is getting a better deal, he says. Clients are getting access to more sophisticated, tailored designs and input into their strategy.
Nick Watts, European head of investment consulting at Watson Wyatt, agrees that, increasingly, there is an overlap in the services offered by consultants and providers. “Particularly where consultants are offering to manage pension fund assets typically through fund of funds and where asset managers and investment banks offer ‘free’ asset allocation advice,” he says.
At the same time there is greater co-operation between various providers, each bringing their own skill set, to find answers to the complex issues facing the industry, he adds.
Watts also predicts that the blurring of roles will continue. “Competition among providers will increase as pension funds and plan sponsors seek creative solutions to reduce deficits in a low-return_environment from a variety of providers,” he says. “The providers that are likely to succeed will be those that provide correctly-priced, un-conflicted advice that is aligned with their clients’ interests.”
But he is doubtful that advice from an asset manager can ever really be objective enough. “It is really difficult for them to
demonstrate complete impartiality,” he says.
It is this danger that conflicts of interest can arise that is the real problem with investment managers getting into what is traditionally the role of the consultant, says Yves van Langenhove, head institutional western Europe at INVESCO.
“If an investment manager starts to give advice on strategy or asset allocation it might not be done in a very professional way, taking all the necessary factors into account,” he says. And the stakes are high. “I think strategic asset allocation is the most important decision that trustees take,” he says.
To give advice on strategic asset allocation, you have to have a dedicated team to do this, he says. As a client, Van Langenhove says he would be very wary of getting advice from a manager who also sells investments. If an investment house does give advice, then it should exclude itself as an investment manager, he suggests.
“That is also very clearly our strategy,” he says. “We don’t want to do custody or consultancy. That is very clear positioning for the client. There are cases where pension funds in Europe take advice from their investment manager rather than taking on a consultant, but this is usually only the case in evolving markets.”
Building on its US business model, Goldman Sachs Asset Management has pioneered a fiduciary management service for institutional investors. The strategy has GSAM working in partnership with the client – a pension fund or insurer – helping with asset allocation, benchmarking, risk budgeting, selection of external managers and monitoring managers.
The group won a substantial mandate in the Netherlands two years ago, says Ruud Hendriks, head of institutional business development continental Europe, Middle East and Africa (excluding Germany and Austria). And in the last six months, it has won two more mandates in the country. “Now we’re in serious discussions with two others,” says Hendriks.
The service can be perceived to overlap with the type of advice traditionally offered by consultants, but GSAM is not in direct competition with consultancy firms, he says. “We offer a wider and different range of services than traditionally offered by a consultant,” he notes. Notably, GSAM must retain discretionary authority to choose external managers. “We retain the hire/fire decision, which is very different from the traditional consulting role.”
GSAM is well aware that in taking on this kind of advisory role – most obviously within its remit to choose outside managers on discretion – there could be a conflict of interest. To avoid this, GSAM contractually cannot hire its own fund managers. “Clients who seek GSAM fund management must do so outside the scope of the fiduciary assignment,” says Hendriks.
Funds interested in the packaged fiduciary management service tend to be large, but not the largest. Hendriks says potential candidates would normally be looking after assets of between €400m and €1bn. “It is not the sort of service that a huge pension fund would want.
It is the middle road where
pension funds feel requirements from government, etc, are
getting complicated, and they are not in a position to do all the
work themselves.”

Although so far pension funds using the fiduciary management service are based in the Netherlands, there is interest elsewhere in continental Europe. “We have seen interest in Germany, Switzerland and Scandinavia,” says Hendriks.
However, this is not a move that any pension fund is likely to make in a flash. “Although the fiduciary authority always remains with our clients, the scope of services offered means they end up outsourcing many current in-house functions. This is a very far-reaching decision for a pension fund or an insurance company to come to,” he says. “Clients first need to educate the board of trustees as to the efficiency gained in a fiduciary mandate, and it can take six to nine months before they come to a conclusion.”
Guy Freeman, vice-president, insurance and pension group at JPMorgan, says that the investment bank has not moved into the area of consultancy by setting up its insurance and pensions group.
”We don’t offer advisory services to UK trustees,” he says, adding that across Europe JPMorgan does have trading relationships with a wide range of pensions funds for both assets and derivatives.
“As part of these trading relationships we do provide access to research and analysis,” he says. “We do, and banks always have, work with corporates on their overall approaches to risk management and this has extended to integrating pensions into their risk management approaches.”
From the point of view of the corporate client, risk management needs to be holistic across all its financial risks, says Freeman. “Just managing pensions risk in isolation can be inefficient.”
Some asset managers will take on the role of adviser in helping clients make their investment choices. But by and large, managers are likely to stick to promoting products and services.
“Ultimately someone has to advise trustees on the appropriateness of alternatives investment strategies,” says Freeman. “While some asset managers will take on this challenge I think it will be rare with most staying in the area of just highlighting and promoting alternative ideas without advising on them.”
Rather than asset managers and investment banks competing on the turf of the consultants, Freeman says it is the other way around. “If anything it is consultants who are trying to compete with banks by branching out from investment consulting for trustees to financial risk management work for corporates when they are really only familiar with the pensions aspects of the corporate,” he says.
But there will always be room in the pensions and investment industry for both banks and pensions consultants. “Neither a bank nor a pensions consultant can provide everything that a corporate needs, as the services are complementary,” says Freeman. “It is the existence of pensions knowledge within the bank that enables the contributions from the bank and the pension consultant to fit together for the corporate clients simply because we understand both aspects.”
Some consultants have already moved into the investment arena, offering funds of funds products, says Freeman. “As pension funds move gradually into run-off there will be less consulting to do leaving simply administration and asset management. Consultants will increasingly gravitate towards these services. In the short term there is an abundance of work for both asset and liability consultants due to the Pensions Act.”
Schroders’ Aukett says investment managers do have a better understanding of certain areas than do pensions consultants. “Perhaps we have a better feel for investment strategy, in terms of expected rates of return and risk,” he says. “We understand the strengths and weaknesses of different solutions and how to implement them.”
In many ways clients are getting a lot of additional input for free in this re-thinking phase, he says. And there is a great need for this, he adds, citing the Myners’ verdict that the level of expertise in the trustee boards of most pension funds, and the desperate need to improve it.

So what is the unassailable territory of the pensions consultant? Investment consultancies have grown up out of strong actuarial backgrounds, says Aukett. In order to provide the advice they do on investment strategy, they require a very good understanding on the liability side from an actuarial point of view.
However, investment managers should have a greater understanding of the market. They are closer to it than consultants, and they are the ones who will be implementing the investment.
Whatever the future division between the role of investment manager and consultant, the demand from clients for advice has been very high in the last year, says Aukett. In 2004, his Strategic Solutions business unit held more than 150 different one-to-one client strategy advisory sessions.
“The demand and the activity level is high,” he says. “That, combined with the provision of education by investment managers – offering trustee training – has meant that the amount of contact with clients has been massive for the last year to 18 months.”
What does it mean for consultants if their market is being eroded? Consultants have never been busier and the opposite of erosion is taking place,” says Watts. “However, we need to ensure we continue to provide best-in-class advice that it is free from conflicts and that the value can be quantified in a transparent manner.”
As well as this, consultants need to make sure they retain their trusted adviser status through giving independent advice. “We also need to position ourselves to take on more responsibility should pension funds and institutional investors lack the governance to execute some of the more complex investment solutions,” says Watts.
Though there are inherent conflicts with the approach taken by consultants who offer investment products, there are ways of avoiding undermining their own independence. “They (the conflicts) are not impossible to manage,” he says. “As the market place becomes more competitive, innovative ways to provide advice alongside products are likely to become more commonplace.”
Will consultants need to redefine what they are? In the current environment where there are investment skill shortages, more delegation of certain decisions to trusted advisors, such as consultants, could take place, says Watts.
“By taking on more responsibility and accountability in this way consultants could redefine their role,” he says. “However, consultants do not have discretion over decision making within pension funds under the trustee model, so current practices and hence consultants’ roles should not change radically in the short term.”

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