The UK’s competition watchdog is carrying out an investigation on pension fund investment consultants and fiduciary managers, which could transform the industry.
The Competition and Markets Authority (CMA) has found that pension fund consultants and fiduciaries are not providing information on fees and performance to clients to a sufficiently high standard. It has linked this lack of transparency to poor competition in the sector. The authority highlighted that pension funds are not being provided with the necessary information to assess the value for money of services provided by consultants and fiduciaries.
The findings match those put out by the Financial Conduct Authority (FCA) last year as part of its study of the asset management market, which prompted the CMA investigation. In that sense, they did not come as a surprise. Nevertheless, pension fund trustees have been warned. They need to probe their consultants deeper to establish whether they are getting the quality of advice they need. It may be the case that many trustee bodies are already doing
that, as part of their effort to ensure good governance. But the study clearly suggests that only the most sophisticated pension funds are able to assess the quality of the advice they get.
Furthermore, while this is a UK investigation, the investment consulting firms involved have operations all over Europe. Therefore it is possible that pension fund clients in other European countries are getting the same treatment. Continental pension funds should take note of the study and compare the findings to their experience.
“Consultants need to show that the potential conflicts of interest in their business models are addressed properly”
It is hard, and perhaps impractical, to speculate on what the exact consequences of the CMA’s investigation will be in terms of market practices or market structure. But it is plain to see that this fundamental area of the pension industry is going to change. Pension funds have to become more sophisticated consumers of investment advice. One way to achieve that is to regularly tender investment advice mandates and demand frequent fee reporting.
At the same time, investment consultants need to improve their offering. They must be able to show that they can make a difference. They can achieve this by providing better and clearer information on fees and by offering methods of comparing the quality of their advice. Standardisation of fee reporting is part of the answer. Consultants need to show that the potential conflicts of interest in their business models are addressed properly.
Millions of people’s retirement savings are at stake. The investment advice sector simply has to bear the consequences of its actions if it has failed to perform to an acceptable standard.
Carlo Svaluto Moreolo, Senior Staff Writer