In the first of a series of interviews with fiduciary evaluators, Margie Lindsay speaks to Barnett Waddingham’s Peter Daniels about how his team assesses fiduciary managers and the challenges for the industry going forward.
Choosing a fiduciary manager is a bit like finding a life partner. Lots of questions to ask and a sensible way to compare and contrast likely suitors needed.
For pension schemes that need to appoint a fiduciary manager or re-tender a mandate, the role of marriage broker has been taken on by a number of evaluators. Among these is Barnett Waddingham, which runs a fiduciary management service called FM Evaluate.
The move to evaluate fiduciary managers follows a Competition and Markets Authority (CMA) ruling that changed the way schemes appoint them. Tenders for first-time fiduciary management mandates are now mandatory and apply to any mandate for over 20% of a scheme's assets. The CMA also introduced a requirement for schemes to run a competitive tender within five years if a fiduciary management mandate was awarded without one.
Peter Daniels is head of Barnett Waddingham's FM Evaluate service. He believes the main challenge for evaluators is making useful and valid comparisons between fiduciary managers - noting that many schemes, particularly smaller ones, need help in not only creating tender documents but in evaluating the responses.
There are also, he says, questions over how fiduciary managers and investment consultants report performance. There is no standardisation, although the CFA Institute has taken over responsibility for introducing the fiduciary management performance standard first created by IC Select.
Daniels says: "My role is to help schemes navigate through this tendering process with existing fiduciary manager or in selecting one for the first time. Our role is to help them make the right decision choosing a manager and then once appointed we can help with monitoring performance."
Alongside the growth of fiduciary managers has been the business of fiduciary manager evaluators. Daniels finds this job stimulating. He believes schemes that want a fiduciary manager can significantly benefit from using an evaluation service.
"Our job is to help schemes select managers and help evaluate performance. Schemes don't need to use firms like us but comparing different fiduciary managers is very complex. They each have strengths in different things and cannot easily be compared. Some don't work well for smaller or larger schemes," says Daniels.
The mandates, he says, are also complicated. Some fiduciary managers may not want to run all the assets of a scheme. They may also have different ways to manage money.
Since a fiduciary manager can allocate across different asset classes, it is not just about appointing the manager but about monitoring the investments and assessing processes. "We explore what the manager is doing and evaluate this for schemes," explains Daniels. For large schemes, he says the problem is often what happens if they want or need to change that manager.
CV: Peter Daniels
Position Peter Daniels is principal within Barnett Waddingham's investment consulting practice and has been head of FM Evaluate, the firm's fiduciary management advisory service, since June 2019.
Previously Daniels joined Barnett Waddingham in 2007 having gained a first class degree in mathematics from the University of Leeds. He qualified as a fellow of the Institute and Faculty of Actuaries in 2011. During his career he has acted worked in Barnett Waddingham's actuarial team and as an investment consultant, advising schemes on investment strategy and governance as well as fiduciary management selection, monitoring and mandate design.
A larger question facing the industry is how to compare fiduciary managers. "They may offer something another one does not. They may have exposures to certain asset classes like private markets or hedge funds. Some clients need someone who can diversify their portfolio, manage risk and protect equity. Not all offer the same things and moving from one to another isn't always easy and can be costly," he continues.
Daniels points to the difficulties of comparing fiduciary mangers "because they all have different mandates and products; they work to different performance targets, risk requirements and other factors. Making a meaningful comparison is difficult."
Some managers try to put schemes into "buckets" with similar risk/return parameters for example. "This won't solve the problem because it is not just about returns; risk is a key factor. You may have a group of schemes that target, say, 3% outperformance. You may bundle them into one group, but different fiduciary managers execute that instruction in different ways," explains Daniels.
Another challenge is around comparing performance itself. As things currently stand, here is no single definition of performance. It can depend on different risk measures with have their own limitations.
Daniels also says performance data does not necessarily tell you what is driving returns.
"You can have the same outperformance target but realise returns in very different ways. One fiduciary manager may do it through equity beta, another accepting liability risk. The new FM performance standard is a step forward but it doesn't give you insight into how performance is generated. It only gives you a raw, crude comparison. By itself, it does not give you insight or a robust way to compare managers," Daniels says.
Value is added by the evaluator who can help not just with selection but also with performance monitoring and oversight. For example several fiduciary managers may be strong on small cap equities, but one may hit performance targets by making big asset allocation plays between equities and bonds, while another may have selected very good underlying managers that produce alpha. "What's driving return and how the trustees want the portfolio managed is important. They need to know and understand what is driving the return from the fiduciary manager," says Daniels.
Designing a process
He sees the role of FM Evaluate as helping schemes - specifically trustees - design a process with the tender document that leads to selection on several measurable criteria. "We treat each tender in a bespoke way. We have to understand the pension scheme and what it wants to achieve and how its wants to do it."
The process is two-way. With the help of FM Evaluate, the scheme designs the invitation to tender or request for a proposal. The fiduciary managers then send back the information requested.
There could be around 30-40 generic questions about financial strength and organisation, for example, in each tender. "For the schemes the real questions are around how the fiduciary manager achieves the scheme's objectives. We craft questions that dive into that. We look at how the investment strategy the scheme wants matches with the fiduciary manager and how that manager can achieve the scheme's objectives. Other evaluators may take a different approach," Daniels explains.
He concedes that depending on what type of evaluator the scheme chooses, the choice of fiduciary manager may be different, too.
"It isn't about having a league table of the top five fiduciary managers. They all do something different, have different processes - and so do the evaluators. We'll have views on the strengths and weaknesses of the fiduciary managers and look to match those as best with the client requirements. There is quite a bit of room for different results depending on who we go with," he adds.
There are also challenges around comparing tenders and timeframes. "Normally we design a tender document, so we get targeted information back. Usually the fiduciary managers are transparent and good at providing the data we ask for. Looking forwards, a challenge will be market capacity - will fiduciary managers be able to provide tailored bids for every case coming to market? The new regulations on retendering have the potential to cause strain in the market," he says.
Evaluating the tenders
Once Daniels has the data, the next step is analysing it in light of the client's objectives and preferences, management styles, risk appetite and other factors.
"For some tenders we know the fiduciary manager will be a good fit and can communicate that to the client. There can be a lot of detail and we aim to cut through the complexity by giving each client the two or three key factors we feel should influence their decision making.
"We may take clients to meet the fiduciary manager. There can be a number of rounds, depending on the client. Some do several site visits to meet key people while others look at systems and organisation. Some like beauty parades where they meet three or four managers a day, with an hour or two for each to present" Daniels continues.
It is not a set process. What works for one trustee board or scheme may not be right for another.
Size matters, too. "The universe of fiduciary managers to choose from will depend on the size of the scheme. Some are equipped to work with schemes in the £500m to £1bn-plus range. Some do not want to work with schemes that are in the £30m-£40m range. Some of the multi-billion-pound pension schemes have a lot of in-house expertise and specialism so need less from a fiduciary manager," he says.
He does say, however, that smaller schemes will get less choice - noting that most managers offering services for smaller schemes favour off-the-shelf solutions because fees for customisation would be excessive.
"The smaller the manager, the less customisation from an implementation perspective. When you get down to the sub-£20m schemes, the choice of manager reduces quite a lot," says Daniels.
He believes this sector of the market, however, is the where the most support is needed as trustees will generally not be investment experts. "They tend to be the ones that can really benefit from appointing a fiduciary manager but have the least choice," he states.
FM Evaluate works across the full range of pension schemes. Some clients manage billions while the smallest is around £10m-£15m. "Someone needs to help these smaller schemes, so we've come up with a service proportionate to them."
There is a lot of demand from pension schemes and this will challenge the industry following the CMA review, Daniels postulates. Over the next five years he expects there to be around 50-60 re-tenders a year. As there is a finite number of fiduciary managers, they will not all be able to respond to such a high number of tenders. "Capacity will be an issue," he concludes.
His advice to pension schemes who want to appoint a fiduciary manager is not to wait, even though there is some uncertainty over regulations and guidance. "If you know you want to go out to tender do it now, otherwise you'll be fighting to get through the process," he says.
An evolving market
Daniels does not expect seismic shifts in the industry as schemes begin to use more fiduciary managers. He does, however, expect to see new entrants - noting that asset managers, who have never had the same level of relationship with schemes as consultants, may now have an opportunities when schemes re-tender. "There is an opportunity for asset managers to break into the industry," forecasts Daniels.
He also sees a trend towards partially delegated rather than full mandates and additionally thinks there will be an increased use of evaluators in the fiduciary space. Daniels explains: "I'd like to think the trend is towards more intermediation by companies like us. The trend is for more schemes to have solid independent advice and not rely on an incumbent fiduciary manager telling them they are doing a good job. That's not really independent advice."
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