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Consultants steering trustees towards own fiduciary services, says CMA

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Pension scheme trustees could be being steered to use fiduciary management services run by their investment consultants without having fully considered the alternatives, according to the UK’s competition watchdog.

The Competition and Markets Authority (CMA) said firms that provide both services had incentives to sell their fiduciary services to existing advisory clients.

In a working paper, it said it had come across some examples of these firms having “strong and persistent strategies” to sell fiduciary management to trustees that were already advisory clients. It had also found examples of practices such as consultants mentioning their own fiduciary management service to existing clients but not other providers’ services.

According to the CMA, around half of UK pension schemes using fiduciary management services had appointed a firm that was already their investment consultant.

Where mandates were won by one of the three largest integrated providers – Aon Hewitt, Mercer and Willis Towers Watson – the firm was already supplying consultancy services to the client in 71% of cases.

“Therefore it would appear that any competition issues in this area potentially impact a large part of the sector,” said the CMA.

The watchdog added: “We recognise that it is not straightforward to say how the practices above might impact competition. However, depending on the context, these practices could contribute to some customers being steered towards the fiduciary management services of their incumbent investment consultants without having fully considered the alternatives.”

The CMA found widespread agreement that investment consultants’ provision of fiduciary management led to potential conflicts between the interests of the firms and those of the clients they advised, which needed to be managed effectively. 

According to a survey of trustees commissioned by the CMA, 60% perceived that consultants steering clients toward their own fiduciary management services was a problem. Half of this group thought the problem was generally well managed, while half felt that more should be done to address it.

The CMA said it had expanded its range of potential remedies following its initial analysis of the supply of fiduciary management by investment consultants. These included restrictions on firms selling both advisory and fiduciary services, requirements for marketing materials to be separated from advice, and compulsory tendering.

The findings are important because of the size of the investment consultancy sector and rapid growth in the fiduciary management market. Last week, Mercer reported that its global assets under management grew by 45% in 2017 to $227bn (€184.4bn).

Although the CMA’s survey showed that only 13% of UK pension schemes were currently using fiduciary management services, it said the market had grown more than tenfold over the past 10 years in terms of number of mandates and the value of assets invested.

Caroline Escott, investment and defined benefit policy lead at the Pensions and Lifetime Savings Association, said: “Although a fiduciary management approach – including those offered by a scheme’s existing investment consultant – can provide many upsides, our members have persistently expressed concerns about the potential for misalignments of incentives in this sector.”

See IPE’s latest survey of European consultants here.

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Readers' comments (1)

  • This is a classic problem. Years ago I worked for a pension consulting firm in the US which offered consulting services and Fund-of-Funds products. Other FOFs were reluctant to disclose the level of detail we needed to conduct a proper due diligence. Despite our assertion that the consulting side was entirely distinct from the FOF side it was hard for FOFs to believe there would not be information leakage. Within our firm there was ongoing friction as the FOFs group felt we weren't doing enough to promote their offerings. The consultants felt they would be compromising their objectivity if they did. Ultimately we had to split the two units of the firm to get past those problems.

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