Europe's Pension Consultants: How competent are consultants?
Trustees would never hire an unqualified actuary or lawyer. But Roger Brown warns that closer scrutiny might reveal that they are taking advice from an unqualified investment consultant
Competency in any profession is based on a combination of professional qualifications and experience. However, this does not always extend to investment consultants.
A recent survey of investment consultants by IC Select found that almost 50% of investment consultants do not have a professional qualification. The survey covered 505 investment consultants, 323 of whom were lead investment consultants and 188 were investment consultants acting in a support role. Amongst the lead consultants, 39% had no professional qualification; 60% of those in support roles currently unqualified. It is understandable that those working in support roles, would not yet have achieved a professional qualification, however, the number of lead consultants not professionally qualified is alarming.
The definition of what is an acceptable professional qualification varies between firms. Some firms define it as being either a qualified actuary, a Chartered Financial Analyst (CFA) or holding a master’s degree, or doctorate, in finance.
At other firms, representing 60% of the survey, the definition also included personnel with the Investment Management Certificate (IMC). The IMC is a basic competency certificate for investment managers that they are required to complete before undertaking a role in an investment team that affects client’s investments, even under supervision from a senior member of the team. Consequently fund managers will typically pass the IMC in their first few months of employment, before completing the professional examinations of the CFA. Clearly, if the IMC had not been counted as a professional qualification, then the number of lead consultants without a professional qualification would have been higher than 39%.
The argument made in support of investment consultants without professional qualifications, is that experience is more important than theoretical underpinning. This argument is undermined by the firms themselves, which generally now expect all trainees to complete the professional examinations of either the Institute and Faculty of Actuaries or the CFA. In my experience, they are right to do so, since, with a few notable exceptions, the best investment consultants are those that fulfill both elements of competency – a professional qualification and relevant experience.
According to the survey, the average experience of lead consultants was 12.5 years of which an average of 7.6 years had been spent with their current employer, whilst those in supporting roles, had 4.8 years experience with 3.3 years spent with their current employer. This level of experience appears more than adequate. However, questions remain about how much of the experience is relevant to an investment consultant.
In a recent tender exercise that IC Select completed for a £600m (€970m) pension scheme, one consultant firm put forward a lead consultant that had 17 years financial experience, but whose only qualification was the IMC. Potentially, the extensive experience could compensate for the lack of any professional qualification. However, closer examination of the financial experience revealed that the consultant had spent little more than a year as an investment consultant, yet 16 as a client relation manager.
The roles of a client relation manager and an investment consultant are both critical to the efficient operation of the pensions industry, but the skills are different. Whilst both roles require client skills, a client manager is responsible for explaining what has happened in the past, whilst the consultant must advise on the most efficient asset structure for the future.
A further issue was that the proposed consultant’s experience as a client manager had been with equity funds, hardly relevant to advising on managing a diversified asset portfolio against a liability benchmark. Needless to say, this consultant, lacking both experience and a qualification, did not get far in the selection exercise.
This type of competence profile is not uncommon amongst investment consultants. For many years, investment consultancy firms, losing their own experienced personnel to fund managers, have recruited client relationship managers from fund managers when they have needed to grow quickly or replenish their resources. In the middle of the 1990s equity bull market, this was less of an issue. However, in the recent turbulent markets, this has contributed to a skills gap that may have been detrimental to the long-term performance.
Investment consultants are key advisers to a pension fund and are critical to a scheme’s long-term success. In recent years, the sophisticated of financial instruments and the breadth of advice that investment consultants now give to trustees requires the highest standards of professional competence. In my experience, there are many talented investment consultants, with appropriate qualifications and experience that do an excellent job. By contrast, there are others whose competence is questionable and this is often reflected in the advice they give.
It is difficult to imagine any trustee board appointing an actuary or lawyer without suitable professional qualifications and relevant experience. Trustees should expect the same standards of their investment consultants. In the UK, the Financial Services Authority leaves it to the consulting firms to determine whether their consultants are competent. Often the consulting firms definition of competence may be at odds with a definition set by a trustee board. I would recommend that all trustee boards consider whether their investment consultant has the competency for the advice they give. If they are not satisfied, then they should discuss with their consultancy firm what can be done to mitigate their concerns. Such an approach will then increase pressure on investment consultants for an improvement in their competency standards to the benefit of all.
Roger Brown is founder of and managing director at IC Select