IPE asks pension consultants and fiduciary managers across Europe and beyond for their views on regulation of investment advice for institutions

The questions
Is investment advice given to institutional investors regulated in your jurisdiction? Do you think it ought to be regulated?

Aon Hewitt, UK
“We operate in a regulated environment. Our reputation, professional integrity, personal job satisfaction and regulatory environment rely on clear understanding of our clients and their situation, our strength in communication and our capability to bring the right expertise to bear on any situation. As a result we invest heavily in listening to each and every client, the training and competence of our people and advice review processes. 

“We regard it as unlikely that regulation would be more demanding in these areas than the standards we set for ourselves. As a result we welcome regulation that is designed to improve the outcome for clients. We believe that the unique nature of each client means that this is usually best driven by principles and that regulatory processes that merely add to the cost of operation or create barriers to competition should be avoided.” 

Tim Giles, partner, Aon Hewitt 

Cambridge Associates, UK
“In the UK most generic investment advice (like investment strategy, asset allocation) is not regulated while the advice on particular products, such as pooled funds, is regulated. Following a recent consultation, the Law Commission agreed with the majority of respondents and concluded that the current structure seemed like an anomaly. But it has not yet recommended a regulatory change.

“Cambridge Associates has eight offices across four continents and is regulated by, amongst others, the UK FCA and the SEC. We believe that we have designed a ‘gold plated’ compliance programme that reflects the strictest standards across these different regulatory regimes. This not only affords our clients the greatest level of protection but also assures consistency of approach, quality and standards across our global business.

“We agree that asset allocation or investment strategy advice can have a bigger impact on a scheme’s investment strategy than the selection of specific pooled fund products and are not averse to strategic advice also becoming regulated. In the absence of regulation, we think pension schemes need to carefully evaluate consultants’ existing regulatory oversight and any conflicts of interests.” 

Alex Koriath, head of UK pensions practice, Cambridge Associates 

Hamish Wilson, UK 
“It is right investment advice to institutions is regulated. But I would caution against more regulation than is already in place for a ‘business to business’ activity as it would risk adding expense and shifting the focus to meeting regulatory requirements rather than client needs.

“However, practices are emerging that are not in the client’s interests, often related to de-risking programmes. One is where the investment consultant itself carries out fund management on behalf of the trustees. This raises issues about accountability and good governance in that the fiduciary manager is advising itself over strategic decisions. The scheme’s liability profile is only one driver but broader issues like the sponsor’s covenant, its cash flow and that of the scheme may permit a departure from the strict analysis. So fiduciary management fuses investment consultancy (the architect) and management (the builder). I’m not aware of any significant building project involving sums comparable to a pension scheme that would not divorce these two roles to ensure the interests of the client (including scheme members) are put first and foremost.

“Another is the offering of other services, ‘free’, to what is another client, at the expense of the primary client – without the consequences being fully understood by either. For example, to conduct dynamic de-risking, the investment consultant acting as fiduciary manager needs a scheme cash flow projection. Some use this also to provide the sponsor with their pension accounting disclosures – supposedly ‘free’, but in reality met from high margins in the fiduciary management fee, paid for by the trustees.

“This is a bugger’s muddle in that: the trustees do not obtain the service they require at minimum cost – it could be lower if the sponsor accounting service were excluded; and the sponsor is being fooled into believing the accounting disclosures are a ‘turn handle’ operation when in fact some strategic issues are involved that are even more important given the inadequacies of the current accounting standards.” 

Hamish Wilson, managing director, HamishWilson 

Jagger & Associates, UK
“I will comment on this from the perspective of being an actuarial firm, regulated by the Institute and Faculty of Actuaries in respect of a range of investment business activities. This regulation is done through the Institute as a designated professional body (DPB), and involves some limits on the activities that can be undertaken. In return for these limits, we enjoy a less bureaucratic regulatory regime than would apply through full FCA authorisation.

“Investment advice is not a terribly well-defined concept – there are parts of normal actuarial work which a layman would regard as investment advice, but which do not require DPB authorisation.  For example, setting the high-level asset allocation for a pension fund or charity, and the methods for how it can be implemented. This even covers the selection of managers for segregated investment mandates.

“There are other parts of actuarial work which are classed as requiring DPB authorisation (‘exempt regulated’ activities). For example, arranging a transfer of assets, or selecting a manager for a pooled fund mandate. These items will form a very small part of the overall work carried out by a DPB-authorised firm.

“Further, there are some areas where they are not thought of as being normal actuarial work, and hence are not allowed under DPB regulation.  For example, managing assets, or running pooled investment funds.  Actuaries can still do this work if they get the relevant FCA authorisation.

“Regardless of whether a firm is DPB or FCA regulated, there is a question for each authorised firm to determine which of its staff are permitted to give advice and in what areas (and by extension, what supervision and CPD programme would be relevant).  From the perspective of a layman, these staff should hold relevant professional qualifications, for example FIA or CFA.  However, in practice, a much lower level of qualification can be accepted, such as IMC.

“If the FCA were to increase the threshold for the minimum level of relevant professional qualifications, the effect of this would vary wildly across consulting firms. However, in any field, not just investment consulting, qualifications do not necessarily correlate with ability (or suitability) to an advice-giving role.  Here, it is arguably more about external perception.” 

Simon Jagger, director, Jagger & Associates 

Novaster, Spain 
“Investment advice is partially regulated in Spain but it is not defined clearly enough. There is a dispersion in institutions regarding registration and supervision which does not help to maintain homogeneous practice. There is one regulator for pension plans and another for the Security Market Agency. In our opinion there should be just one regulator for the pensions consultancies that integrate all areas involved.” 

Diego Valero, chairman and CEO, Novaster 

PPCmetrics, Switzerland
“Currently, investment advice is not regulated, as long as such activity does not qualify as asset management. The Swiss government recently presented a legislation project extending Prudential regulation and supervision to all asset managers. In this context discussions might arise on implementing the same regime to investment advice activities as well. Presently we do not see a necessity to do so.”  

Lukas Riesen, partner, PPCmetrics 

Prometeia Advisor Sim, Italy
“In Italy only specific investment advice is regulated and can be carried out by supervised companies, and such advice must involve specific ‘financial instruments’ with reference to specific investor needs: in order to offer such advice the consultant has to gather information to outline the client risk profile and internal skills, comply with conflict of interest policy, and file all the information and documentation for further auditing. 

“At the same time, other services, such as strategic and tactical asset allocation and manager selection, can be freely carried out by all kinds of companies that are not supervised nor regulated. 

“Prometeia Advisor became a Società di Intermediazione Mobiliare (Sim), a kind of ‘light’ financial institution, in 2006: as a consequence, we can extend all the procedures and internal controls to a wide range of investment consulting services. Few competitors did the same: many prefer to maintain their status, avoiding external supervision and adopting ‘borderline’ solutions and offerings. The regulator should address the topic in the future, hopefully requiring a wider range of investment consulting services to be regulated and supervised, in order to protect institutional investors.”

Andrea Nanni, head of pension fund advisory, Prometeia Advisor Sim 

Russell Investments
“It varies by region, but in general generic advice around asset allocation is unregulated.  This can appear anomalous, given that it has the potential to have profound impact on investors’ results.  However, it’s well understood that regulation can have unintended consequences and any attempt to regulate this area of advice would need to be principle-based rather than rules based.   

“Given that the advisory market is already very concentrated, a narrowing the range of providers equipped and willing to give this advice would probably not be a good outcome.  Crafting such regulation would require careful thought. We would advocate a code of practice to promote proper standards in the first instance.” 

Pascal Duval, CEO EMEA, Russell Investments  

Towers Watson
“Broadly speaking, yes, [it ought to be regulated]. The regulation of investment consultants now seems somewhat dated, with advice on the provision of pooled vehicles regulated, unlike similar advice on segregated portfolios. Furthermore, advice on portfolio strategy can have a more profound impact on a scheme’s finances than advice on manager selection, yet it does not need to be provided by a regulated adviser. In order to help all trust-based pension funds to get a minimum standard of advice in these matters, we would advocate that such advice be regulated.

“One concern that accompanies any review of regulation is the potential for unintended consequences. We would welcome regulation that raises the degree of professionalism in our industry while recognising that trustees now need more expertise from consultants than before to deal with an increasingly complicated world.” 

Ed Francis, EMEA head of investment, Towers Watson

Consultants and pension funds: When disagreements arise