US lawmaker calls for probe into fiduciary management conflicts of interest
A senior US politician has written to the federal government calling for a fresh investigation into pension fund consultants that also manage investments, particularly regarding conflicts of interest.
In a letter seen by US broadsheet The Wall Street Journal, senior Rep. George Miller (Democrat, California) wrote to US secretary of state for Labour, Thomas Perez, requesting that he investigate possible conflicts of interest in consultancies that manage investments in addition to providing investment advice.
In the letter, Miller claimed the growing trend of US pension funds – with $18.8bn (€13.4bn) in assets, according to Towers Watson – using consultancies to manage assets created significant and inappropriate conflicts.
He called on the Labor Department to look into the practice as the government body works to create new governing rules on the role of advisers.
On both sides of the Atlantic, the issue of conflicts of interest has often been cited as a main concern for pension fund trustees when considering, or ruling out, the use of a fiduciary manager.
Despite this, in Europe, the growth of fiduciary management has been substantial, as it reaches maturity in the Netherlands and sees year-on-year growth in the UK.
In the UK, the market is dominated by consultancies converting investment-consultancy clients into fiduciary management clients, in arrangements similar to those highlighted by congressman Miller.
While the overall AUM in fiduciary contracts grew in the UK, most mandates still fell to traditional investment consultancies.
A recent study by consultancy KPMG often found these mandates were awarded without an open tender, although this practice has begun to subside.
According to KPMG, the UK fiduciary management market is worth approximately £58bn (€71.5bn), as at 30 June 2013, with around 345 mandates.
However, 75% of mandates were awarded to implemented consultancies over specialist fiduciary management providers and investment managers, the latter only accounting for 3% of mandates.
Further, nearly half of pension funds with fiduciary mandates make no effort to review manager performance independently.
Data from IPE sister publication IP Nederland found that around 80% of pension fund assets in the Netherlands were managed in fiduciary contracts. However, the Dutch market is more accustomed to employing specialist providers compared with the UK.
It is the style of fiduciary management most prevalent in the UK to which the US politician has raised concern for his own market.
The Wall Street Journal recounts a similar 75% figure of pension consultants acting as both investment managers and advisers for clients, according to filings with the Securities and Exchange Commission (SEC).
Also, an SEC investigation in 2005 found that consultants had accepted payments from investment managers as they advised pension fund clients on which managers to select for mandates.