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Love them or hate them, can’t live without them

Relationships between pensions funds and their consultants are more durable than many marriages, according to this month’s Off the Record survey, even if some respondents seem unsure about what their consultants actually do. Some pension fund managers note their partners’ drawbacks: the cost, a tendency to tell you what you want to hear, but most seem to feel they are getting value for their money
While the majority of respondents to this month’s Off The Record questionnaire on consultants are using third-party advice for their business, it appears that most would need a consultant to assess how beneficial their services are.
Over four fifths of replies state that advisers are brought in to perform a variety of tasks for the fund, with 54% using consultants for straight actuarial work and slightly fewer using them for asset liability modelling, investment advice and manager selections.
Around 35% of schemes use third parties for benefits, both local and international and performance measurement, with a handful of managers requiring external help for scheme administration, accountancy and group insurance issues.
The small number of funds not using advisers give the main reason as sufficient in-house knowledge, with only a solitary fund manager declaring: “I can’t see the added value in third party services.”
And the split was 50/50 between those schemes considering the possibility of outside help in the future – mostly for advice on regulatory changes – and those ruling out external help altogether.
Consultants can sleep easily then in the knowledge that they are a valued part of the investment chain, a point backed up the longevity of some of their contracts. On average, respondents maintained their consultant relationship for approximately 17 years. Some have never switched. Several have stayed spliced for over 35 years.
The number of consulting partners for each fund also averaged three per scheme, although the dispersion of the figures ranged from the single adviser up to a raft of 12 being used by one company for a variety of specialist tasks internationally for its pension fund needs.
The global dimension to pension fund issues today is also recognised by the fact that over half the funds opt for consultants that are part of an international firm and 40% of respondents selecting advisers which are part of an international network.
Only a fifth of respondents now use a local or national consultant, with a large part of this figure made up of funds operating a hybrid local/international approach.
For one pension fund manager it may be that the duration of the relationship has blurred the memory. Concerning the local or international nature of the fund’s consultant, the reply was a succinct: “I don’t know.”
Choice of consultant also happens through a variety of mediums. While a number of respondents commented that their advisory relationship was a legacy of former decisions or dictation from the mother company, the largest amount – 35% of replies – say they do carry out a beauty parade before taking any decision. This is only marginally higher though than the 28% of pension fund respondents who say they rely on peer recommendations for consultant appointment.
More worrying for consultants is the fact that approximately a third of funds say they have changed investment adviser in recent years.
However, the prime reason cited was consolidation in the market, with a sole respondent saying they had changed consultant when re-evaluating their asset/liability approach.
Overwhelmingly the message from pension funds is that third party advice is a must with almost all respondents noting the need for objectivity before making decisions.
As one respondent sums up: “The consultant is a ‘sounding board’ for all the major decisions we have to take – giving us knowledge and saving us time.”
A couple also point out consultant necessity for actuarial calculations and FAS87 US accounting compliance, with others also noting a desire for international expertise in their advisory remit.
Yet managers are also quick to point out the drawbacks of consultants – and the main sore point is definitely cost, with 75% of respondents saying they felt advisory fees did not justify the service received.
One manager doled out an ominous warning: “Beware, they tell you what they think you want to hear.”
A few comments were more cutting: “They mainly confirmed our ideas and did not add too much value by themselves,” says one fund manager.
Another adds: “They are dominant, ie – the actuary, in the fund knowledge they hold. Staff turnover is too high and they don’t always appreciate what is required.”
One scheme manager felt the consultants almost held the fund to ransom: “The trustees won’t do anything without their written advice!”
Surprisingly though, four fifths of the managers replying, thought their consultants gave value for money, with one eulogising: “We couldn’t live without them.”
One dissenter replies with a firm “No”, while another says: “It is difficult to assess.”
A similar split arises over the question of whether a fund would recommend its consultant to a peer, with just under 20% saying they wouldn’t.
And despite the general satisfaction with consultancy costs, all respondents say they remunerate their advisers on a fee basis. This seems to tie in with the hung jury over the question of whether consultants should be accountable for their advice. Voting came in at almost 50/50, with the ‘shoulds’ marginally ahead.
Some scheme managers warn of the possible implications though. “If consultants were accountable for advice then in terms of receiving fees there might be the possibility they would give safer and ‘poorer’ advice,” cautions one manager.
One of the ‘shoulds’ notes that consultant investment advice might be performance measured against the tactical asset allocation benchmark and that consultants should also offer performance figures for active managers compared to a passive benchmark.
Another sums up the inherent difficulty of the question: “I’m not sure what mechanism you could suggest for accountability. The key is due diligence when you are hiring the consultant.”
“It may be possible to measure consultants on the success of the manager lists they recommend, but all investment advice should be revisited and assessed,” echoes another manager.
In terms of consultant encroachment into the world of money management with multi-manager funds, the message is firmer. Pension funds are worried that this could lead to a conflict of interest and remove the impartiality from advice.
Seventy five per cent of respondents say they think it is a bad idea for consultants to go down this path, complaining of a loss of independence. “I want totally impartial advice and if a consultant has a product of their own I would always be slightly suspicious,” says one.
A few respondents have a mixed view. “I think it is good in part and shows whether the consultant can really add value through manager searches, but the potential conflict of interest has to be factored in any subsequent degree of digression, responsibility or accountability,” says another manager.
In summing up, one commentator points out that this might not be the consultants’ realm.
“The jury is still out on this issue, but I would question any consultants’ level of expertise in this area.”

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