Putting the 'fiduciary' in fiduciary management
FairPensions's Christine Berry examines what the term 'fiduciary' means in our current world, to whom the duty applies and if it can be transferred away from trustees.
Fiduciary management is a hot topic. Recently there's been much discussion and debate about what it means, how it works and whether it's the answer to trustees' prayers or a disaster waiting to happen. But relatively little of this discussion has focussed on the term itself: what puts the 'fiduciary' in 'fiduciary management'?
Trustees outsource more and more of the key decisions about how a fund is invested, but cannot renounce their fiduciary duties: in other words, they delegate power without responsibility. Whatever one's views about the specific services labelled as 'fiduciary management', there's no doubt that this is a wider trend - and one that raises fundamental questions about the nature of the fiduciary relationship.
Fiduciary duty is predicated on a fairly simple bilateral relationship between trustee and beneficiary. A hundred years ago, this might have corresponded to reality. But how does it apply to the complex webs of principle-agent relationships that make up the modern investment chain?
When FairPensions posed this question, as part of the research for our report, 'Protecting our Best Interests: Rediscovering Fiduciary Obligation', we encountered utter confusion. Fiduciary duty is a common law concept, which means there is nothing on the statute book that lays down exactly who or what a fiduciary is. Instead, fiduciary status is based on the quality of the relationship between principle and agent. The key characteristics of this relationship - according to the UK Law Commission, which examined these issues back in 1995 - are vulnerability and dependency on the part of the principle, and discretion and power to act on the part of the agent.
On this basis, it seems reasonable to conclude - as, indeed, the Law Commission did - that anyone given responsibility over key decisions about the management of somebody else's money is a fiduciary. That includes asset managers, but importantly, it may even extend to investment consultants.
Fiduciary duty is not just about control over someone's assets, but control over their interests. As the Myners Report observed a decade ago, where trustees are legally bound to take advice and are not in a position to challenge that advice, consultants exert significant influence over crucial decisions. Again, their role fits the criteria. For this reason, investment consultants are accepted as fiduciaries under US law.
But there's also a need to go beyond the fiduciary label and ask how fiduciary standards can be achieved in practice. At its heart, fiduciary duty exists to tackle the all too human temptation facing those entrusted to act on another's behalf: to put one's interest ahead of one's duty. From this stems the core fiduciary duty of undivided loyalty - which entails a duty to avoid conflicts of interest. Yet, paradoxically, fiduciary duty has not been a prominent feature of debates about conflicts of interest - and, conversely, conflicts of interest do not seem to feature much in debates about the nature of fiduciary duty.
Even those who already describe themselves as fiduciaries - such as many UK asset managers - often do not seem to connect this with the duty to address conflicts of interest. Indeed, when FairPensions surveyed leading asset managers' disclosures under the UK Stewardship Code, conflicts of interest policies were one of the weakest areas.
Whether it is an asset manager casting votes on issues which affect their parent company, or a consultant standing to benefit from recommending ever more complex investment approaches, investment agents are by no means immune from the possibility of conflicts harming their beneficiaries. There is clearly a need to ask some challenging questions about whether fiduciary obligations are really being understood and fulfilled.
Finally, it's important not to forget that trust-based pension schemes are a dwindling proportion of the landscape. In 2009, 3.3m people were active members of UK trust-based schemes, while 3m were members of contract-based workplace arrangements, with many more saving into individual personal pensions. In other words, more and more savers are moving out of the fiduciary sphere altogether.
But is the nature of the relationship between individual saver and insurance company really so different from that between trustee and beneficiary? Or, like asset managers and consultants, could it be said that these providers are fiduciaries as well?
In jurisdictions that do not have the concept of the trust, all pension providers are subject to the same legal requirements. There's an urgent need to explore how the same consistency can be achieved within trust-based systems, so that all savers are guaranteed the same level of governance, accountability and consumer protection, regardless of the form of their pension arrangements.
Ultimately, legal clarity can only come from regulators, governments or the courts. But there's also a need for self-examination within the industry about what it means to be a fiduciary. This debate is crucial for the future of pension saving - and it's one that needs to begin.
Christine Berry is policy officer at the London-based lobbying group FairPensions and author of the report 'Protecting Our Best Interests: Rediscovering Fiduciary Duty'.