The pensions consultants in the US and internationally are under considerable financial pressures, Brian Meath of Lazard Asset Management told the Consultant Day meeting in Frankfurt recently. These were pushing consultancy firms to situations where there were increasing potential for conflicts with the interests of their clients.
Investment advisers in the US are increasingly running ‘investment conferences’ where they charge large fees to asset managers, which provides them with access to the clients of the consultancy firms, said Meath. The asset manager firms can each be charged perhaps $50,000 to $70,000 to participate, so it can be a significant source of revenue for consultants.
“But these events are marketed as an investment conference,” he pointed out. “Is there any conflict of interest in putting clients in front of managers who are chosen by their willingness to pay?”
Meath also pointed to consultants who were advising asset managers about developing their businesses. If there are potential conflicts of interest, it is an area where consultants needed to be clear about what they are doing. Referring to the move by consultants into multi-manager management activities to earn asset related fees, he queried how they maintained their position of independence.
Meath warned that clients have to be convinced of the objectivity of the advice given. “If the advice is shown not to be objective, consultants won’t keep their business.”
The reshaping of the German asset management marketplace was predicted by Hans-Jürgen Dannheisig of BHW Invest, who pointed to the development of the ‘Service-Fund Management Company’ as the next stage after the ‘temporary fashion’ of master-KAGs . “This concept will become the norm in institutional fund business.”
The transparency this ‘service-fund management’ approach would be suitable for mutual funds as an alternative to using an umbrella fund structure, he added. Seeing the growth of pure fund management companies along US and UK lines using ‘service fund management companies’. He reckoned by 2007, around 75% of assets will be managed by such firms, with around 50% of institutional having masterfund mandates. While 25% would remain in traditional Spezialfonds, the great majority would by handled through service-fund management companies.
The characteristic of typical mandates is that there would a division of labour. With the outsourcing of portfolio management to external asset managers through the multi-adviser, the core competency of a fund management operation involves the reporting function, risk control management and ensuring quality of delivery.
Among the features of this model, he pointed to the implementing of the ‘best of best principle’ and “the free choice of business partners, particularly with regard to dealing activities”.
He considered ‘fund administration’ to be a “redundant function” as between custodians, fund management and asset management companies. “The resistance of the German federal banking supervisory office regarding fund administration being done at the custodian bank is decreasing.” It was no longer a question of deciding whether to build of buy such systems – “just ally”, advised Dannheisig.
In welcoming consultants to the ‘Consultant Day’ meeting, Andreas Hübner, who runs Lazard’s asset management operations in Germany, referred to changes in the German marketplace. “Clients were dissatisfied with what had been delivered to them over the past three years.” The areas of tactical asset allocation and the question of achieving absolute returns were being looked at.
Hübner pointed to the need to meet clients requirements. He did not want the situation to arise where clients would want to take suppliers to court as some Swiss banks had been by their clients.
The Consultant Day was organised by Lazard, BHW Invest and State Street, who happen to share the same office building in Frankfurt. Altogether around 12 consultants attended from large and small firms, domestic and international. It is the second time this event has been run.