Some of the largest investment consultants to UK pension schemes have welcomed efforts by the Financial Conduct Authority (FCA) to encourage competition in the market but also defended themselves in response to concerns raised by the regulator about fiduciary management services.
The regulator today presented the interim findings of its study into the asset management market, as part of which it said it had found concerns about the way the investment consultant market operated.
The regulator said “an in-depth investigation” was required given the potential detriment arising in this part of the value chain, the impact this advice has in determining future returns, the lack of regulatory oversight and the difficulty institutional investors face in assessing this service.
It also raised concerns about conflicts of interest when investment managers provide fiduciary management services, and said it was proposing to introduce greater standardisation of price and performance of fiduciary managers.
It said the performance and fees of fiduciary managers “appear to be among the most opaque parts of the asset management value chain”.
It added: “A lack of publicly available, comparable performance information on fiduciary managers also makes it hard for investors to assess value [for] money.”
The FCA’s comments were welcomed by Richard Dowell, head of clients at Cardano, who said the FCA’s plan for better disclosure of fiduciary management performance was “a much needed and positive step”.
“Much work has previously been conducted around costs and charges, but little focus has been placed on the transparency of performance,” he said, calling on the FCA to agree a standardised approach to performance measurement.
“This will help to ensure trustees can easily and accurately compare, review and select their providers,” he said.
James Trask, partner at pensions specialist Lane Clark & Peacock, said the FCA’s concerns about conflicts of interest in fiduciary management came as no surprise.
“The conflict is clear,” he said. “In a fiduciary relationship, the consultant is ‘marking his own homework’, as it was put to me recently. Clients really must get independent advice on the performance of their fund manager.”
However, he questioned some of the findings and associated recommendations reported by the FCA, such as that consultants are infrequently changed and that there should be compulsory re-tendering of mandates.
He also challenged the FCA’s finding that consultants did not help smaller institutional investors negotiate on investment management fees, saying that LCP “frequently negotiate[s] favourable rates to apply across our client base”.
Danny Vassiliades, head of investment consulting at actuary and actuarial consultancy Punter Southall, did not address fiduciary management but welcomed the FCA’s attention to competition in the investment consulting sector, suggesting that, to increase competition, the FCA should “consider in more detail ways in which schemes can assess the performance of their consultant and determine whether their fees have been justifiable”.
Big player pushback
Some of the largest investment consultancies said they welcomed the FCA’s interim report but also defended their work.
Tim Giles, senior partner and head of the UK investment consulting practice at Aon Hewitt, named by the FCA as one of the players dominating a concentrated market alongside Mercer and Willis Towers Watson, suggested the FCA and Aon Hewitt had the same aims and that “[t]herefore, anything that encourages competition to ensure investment advice delivering better outcomes has our wholehearted support”.
He acknowledged Aon Hewitt had a large share of the market but said “that is because clients have decided to work with us, as they recognise our size provides the range of services and choice that may not be available elsewhere”.
He added: “Our clients choose between us and a wide range of competitors in the market.”
On conflicts of interest, Giles said “[all] providers and decision makers in the market have potential conflicts” and that Aon Hewitt “[takes] all possible steps to understand our clients’ needs and to manage our potential conflicts”.
He said: “We note that the FCA has not found any evidence of failure to manage potential conflicts.”
Ed Francis, EMEA head of investment at Willis Towers Watson, said the company welcomed the FCA’s interim findings but cautioned that “any further regulation” should not impose higher costs on investors.
He said advice on portfolio strategy should be regulated “to help trust-based pension funds to get a minimum standard of advice on these matters”, and that this advice could have a bigger impact on a pension scheme’s finances than advice on manager selection.
On fiduciary management, Francis said the firm was “acutely aware of the need to provide clients with an unrivalled level of transparency on fees and performance” and that it “fully support[s] transparency, measurement and the reporting of meaningful performance figures for fiduciary managers”.
He noted steps taken by Willis Towers Watson to disclose figures showing the performance and track record of mandates run on a fiduciary-management basis, saying that these “clearly demonstrate” the materially positive impact fiduciary management can have on pension scheme’s financial health.