Is investment consultancy too powerful and uncompetitive?

The Financial Conduct Authority's referral of investment consultants and fiduciary managers for investigation by the Competition and Markets Authority (CMA) in September shook the industry.

The CMA is looking at whether there are any market features which prevent, restrict or distort competition. If it does find competition concerns, the watchdog will decide whether action is needed, and what the solutions might be.

Some of the concerns are around a small group of advisers dominating the market, and investment consultants acting as advisers but also as fiduciary managers.

Given the seriousness of the matter, around 32 different stakeholders have given their views on the CMA's methodology and the issues raised, such as a perceived lack of competition and barriers to entry.

Competition

While of course the three largest consultancies, which hold around 60% of the advisory marketplace, would argue there is abundant competition, interestingly many of the smaller firms hold a similar view. Redington's response says while some barriers to entry and expansion do exist such as bundling of services and not being a well-known brand, its growth from a start-up 11 years ago "shows that these can be overcome". Prospective clients often find it challenging to entrust a newcomer, it says, and therefore had to invest in building up its brand and trust.

Hymans Robertson head of investment consultancy John Walbaum argues competition has never been better.

"We've seen firms grow from scratch 10 years ago and reach scale, firms within other businesses have successfully reached scale over that period, while firms like us have grown and taken significant market share away from the big three. While I understand criticism of concentration, it's better than it ever has been."

The Pension and Lifetime Savings Association's (PLSA) response only mentions the word ‘competition' twice, and seems to hold back from taking a strong view on it. Although, it says the potential detrimental effects outlined by the CMA are "correct", and that members have raised concerns about reduced innovation and how advice is offered in practice.

Lack of transparency

For competition to work effectively and deliver good outcomes, trustees must be able to assess and compare consultants and fiduciary managers. However, there is disagreement on whether they have difficulty doing this, and if so, why.

Redington argues there is a lack of transparency over fees and performance, and that trustees find it difficult to do like-for-like comparisons across providers.

For Cardano co-head of clients Richard Dowell, lack of transparency is a problem in both investment consultancy and fiduciary management, and that more would lead to better competition. He says there should be a consistent approach to performance measurement across both, and dismisses arguments this would be difficult.

"As a buyer you want to get the best of the industry. Without transparency of information it's hard to make decisions, and compare to experience."

Interestingly, some responses warn introducing more onerous requirements could actually restrict competition. Redington argues standardised performance metrics would be a disadvantage to new entrants to the market, and introducing mandatory tendering would make it harder for smaller firms to compete for business and could therefore distort competition.

Meanwhile, First Actuarial cautions a methodology for comparing investment consultancy fees would unlikely produce meaningful information for trustees.  

Hymans Robertson's Walbaum adds: "Procurement costs for consulting are already high, and anything that forces higher costs on the industry will mean less competition.

"That's a worry as we feel competition is now in a pretty good place compared to a number of years ago."

Demand side

An interesting question to ask is why investment consultancy has become so dominant and why we often hear that trustees rely too much on advisers.

The PLSA's response notes smaller schemes lack the governance capacity and investment expertise to deal with the many challenges, and those without internal investment expertise are more likely to rely on advice.

Andrew Warwick-Thompson, who recently left The Pensions Regulator as executive director for regulatory policy and is now chief executive of the LGPS Central pool, believes consultants have become so powerful because "the trustees of a great many pension schemes are just not capable of doing the job themselves", and consultants have effectively filled the skills deficit.

"The fiduciary management model set up by many advisers to run things like liability-driven investment strategies was in recognition of the fact trustees didn't have the expertise to do it themselves, so it's actually better to delegate a lot of the decision-making," he says.

"Irrespective of what we think about the advisers and whether there's a concentration of power in a small number of them, we have to ask ourselves whether the trustee model is fit for purpose anymore. I've reached the conclusion over many years that it's not. Too many trustees just don't know what they're doing."

He goes on to say: "I'm not defending the consultants; they may well be doing something naughty and no doubt the CMA will find out if they are, but we need to look very closely at the other side. There are some really fundamental, systemic problems with the trustee model and we shouldn't ignore them by blaming someone else."

It is absolutely essential that the CMA's investigation takes a holistic and in-depth look at all parts of the chain to identify potential problems and what has caused them.

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• Topics
• Law and Regulation
• Industry
• fiduciary
• consultant
• trust law
• Andrew Warwick-Thompson
• LGPS Central
• Cardano
• Richard Dowell
• Hymans Robertson
• Trustee
• The Pensions Regulator
• John Walbaum