This month we look at the arguments for and against RFPs. The objections against RFPs are familiar enough. RFPs are costly and time-consuming and tie-up resources which could be better used in administering pension funds or managing assets.
It is also argued that the inordinate length of some RFPs, - which can run to 50 or 60 pages, depending on the ingenuity of investment consultants - will deter all but those asset managers who have the resources and stamina to take part in such a paper chase
Another objection is that RFPs make it more difficult rather than easier to choose the best asset managers because they frighten off the small but talented investment management house. Instead they allow the larger houses, which have more resources at their disposal, to give a false or misleading impression of their capabilities.
The arguments in favour of RFPs are that they are a valuable organisational tool for pension funds. They enable them to compare and contrast the capabilities of different investment managers, providing the information they need to draw up a short list of managers for personal interview. In this view, RFPs are an essential stepping stone or building block in the selection of investment managers.
So do RFPs facilitate or impede the selection of investment managers? Do they provide the best management firms or merely the firms that are best equipped for laborious form-filling and box ticking?
We wanted your views. The response from the pension fund managers, administrators and trustees who responded to our questionnaire reveals a broad range of opinion, but agreement on the main question. The general feeling is that, although RFPs may be time-consuming and costly, they are a necessary part of the selection process.
Much depends on how they are drafted, some respondents suggest. RFPs are as good, or as bad, as the pension funds or investment consultants that drafted them.
There is little real concern that pension funds are missing out on the best investment managers because of the cost of RFPs. Only a small majority (53%) agree with the suggestion that some asset managers will not tender for mandates because of the time and expense involved in the preparation of RFPs.
There is a far higher level of agreement (82%) that the smaller asset management firms are likely to be discouraged by the length and complexity of the tendering process because they lack the necessary resources.
The problem may lie less in the RFPs than in their drafting. Investment consultants, who are often responsible for drafting RFPs, come in for their share of criticism. The manager of a French pension fund comments: "In my opinion an RFP is essential for selecting asset managers. Unfortunately, the problem is that the RFPs drawn up by most consultants are excessively long and complex. It would be necessary to return to the heart of the matter. The best RFPs are not necessarily the longest."
For public service pension funds within the countries of the EU, there is the added disincentive of the EU competitive tender process, a procedure of Byzantine complexity which must be used for all tenders for goods and services put out by public bodies.
Three quarters of our respondents (76%) agree with the suggestion that generally the EU procurement process is not well suited to tendering for investment mandates, and 75% believe the process is likely to discourage talented investment management ‘boutiques' from tendering.
In the past, some pension funds have complained that RFPs conceal more than they reveal; that they enable asset managers to play down their deficiencies and over-state their abilities. This complaint gains some support from our respondents. Three in five (59%) agree that RFPs may give a false impression of an asset management firm's capabilities.
However, 76% think that RFPs can be useful as an organisational tool. One UK pension fund manager suggests that RFPs are a necessary step in the preparation of a shortlist. "It is necessary to prepare a short-list somehow as there is not time to interview all possible managers, and the managers should be asked similar questions for consistency."
RFPs also provide pension funds with a quick thumbnail sketch of a fund management firm's features. One manager of a Dutch pension fund points out that "RFPs can be useful in a first round to get a quick impression".
Most pension fund managers feel that RFPs are the only practicable way to shortlist investment management firms. Three in four (74%) respondents agree that RFPs are the best way for a pension fund to select investment managers from a ‘long list'. A Swedish manager suggests that the RFP should be "the second step after numeric screening".
Are personal interviews preferable to RFPs? Three out of five respondents (59%) believe face-to-face interviews with investment managers are likely to be more informative than RFPs.
Yet most managers see personal interviews as part of a process which includes RFPs, and not as an alternative to them. "Face-to-face interviews are preferable but will normally occur later in the selection process," the manager of a Swedish pension fund observes.
But not everyone agrees that face-to-face interviews are preferable. For some, personal interviews with asset managers are often merely an opportunity for unwanted marketing presentations. One UK pension fund manager says bluntly: "We need consistently presented hard facts to have a discussion about, rather than listening to lots of marketing waffle."
RFPs should be standardised, he says, to cut down the time spent on completing them. "It would be better to use standard RFPs across pension funds to minimise the work for the managers, so they can do their real business - managing money, not form-filling."
Form-filling not only wastes investment managers' time, it may encourage two-thirds (66%) of the managers who responded to our survey agree that the ‘tick box' approach of RFPs encourages lazy tendering by asset managers.
Yet one Dutch manager points out that asset managers should not be allowed to get away with lazy tendering. "If this is happening, you may need to look for a new account manager."
Most managers (88%) agree that RFPs encourage ‘boiler plating', that is, using generic material that has been used in previous RFPs. This is not necessarily seen to be a fault. One Swedish pension fund manager asks: "Why not re-use earlier RFPs if it is the same questions?"
Only one in four respondents (24%) thinks that the preparation of RFPs wastes resources that could be used more profitably by both pension funds and asset managers.
Perhaps the view of a manager of a Belgian pension fund sums up the general view that RFPs are, for all their faults, the best tool available to pension fund managers.
"The RFP process can, in some cases, be a boring and time-consuming step. However, I do feel it is as good as indispensable," he says.
"For us, the quality of the answer from an asset manager to an RFP is an indication of the quality of the information and reporting that we may expect from this manager if we should eventually choose him. If you get a ‘sloppy' answer, chances are that this firm is equally sloppy in other areas, which can prove to be much more meaningful.
"RFP's are just one of the necessary steps to take when selecting a manager, but obviously it is clear that it is not the only one."
In short, the paper trail has its place.