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  • Investment

The fiduciary evaluators: KPMG's Greg Wright

Wright:
Wright:
  • Margie Lindsay
  • 03 January 2020
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In the fourth of a series of interviews with fiduciary evaluators, Margie Lindsay speaks to KPMG’s Greg Wright about why he sees the evaluator role as critical in selection and monitoring processes

A combination of deep understanding of fiduciary service providers and the ability to interpret and calibrate responses to tenders is what KPMG's director of investment advisory Greg Wright says is the key to selecting a fiduciary manager.

While many agree there is a need for a more rigorous tendering and selection process when choosing fiduciary managers, he thinks the role of third-party evaluators in the process is critical.

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The choice of a fiduciary manager is one of the most important decisions trustees will make, says Wright. Most use an independent evaluator to help them to design the tender and to compare managers. Many evaluators are then kept on for independent oversight and monitoring of the fiduciary manager.

Wright is in no doubt that evaluators are a necessary. Comparison of fiduciary managers is fraught with challenges and contradictions. It is not simply a price comparison, says Wright. Range and quality of services are tricky to compare.

Even before the move by the Competition and Markets Authority (CMA) to change the way fiduciary managers were appointed, KPMG was looking at ways to support trustees outsourcing some or all investment activities. "This has been part of our business for over 10 years: helping trustees from the first discussion of whether appointing a fiduciary manager is the right way for them through to identifying a shortlist of fiduciary providers and helping to appoint one. We're also often involved in transition and on-going monitoring," says Wright. 

Traffic light rating process

KPMG has a team devoted to understanding the fiduciary provider market. Although the firm has been doing fiduciary manager selection for some years, it did not use a formal rating process until last year. The approach is similar to that used by the firm for comparing investment manager funds.

"The rating process is extremely helpful. It uses a traffic light rating system in all areas and provides trustees with a framework against which to measure providers from the selection process and over time. If we at KPMG change our view and the traffic light changes, we can give reasons for the change. This helps trustees when they question the provider and could also alert them to the need to appoint someone else," explains Wright.

The rating criteria assesses a variety of areas including investment philosophy, business management, past performance among other factors in order to come up with an overall rating for each provider.

However, provider ratings are not the driving factor in selecting a fiduciary manager. It is simply the base for selecting managers who best fit with the pension plan's own preferences. "Some like open architectures or active managers while others prefer the opposite. We factor this in. This creates a very different short list of providers for each pension scheme," Wright explains.

The ratings also give KPMG a basis on which to begin discussions with providers. The firm talks to fiduciary managers on a regular basis to keep up to date with any changes that could affect services.

In parallel, Wright's team looks at which fiduciary products are most suitable for the client. For example, it could be that the scheme is looking for a private market fund or prefers off the shelf solutions.

When questioning fiduciary managers, Wright says each one has a different way to answer, using a variety of terminology, risk models and other information. "Unless you understand and know how to compare like for like, the selection process will not be rigorous. You need a combination of deep understanding of the providers as well as the ability to interpret and calibrate their responses to questions," Wright notes.

The aim, he says, is to compare apples to apples - something he admits can be difficult to achieve. "The role of the third-party evaluator is to add value and interpret the answers correctly. We work with the scheme before sending out the tender to properly define what the mandate should cover, what the scheme can do itself and what it needs to outsource. We look at investment beliefs and other factors - everything that is influential in determining what the scheme will expect providers to do. Without expert support this comparison of fiduciary managers could throw up the wrong results," he says.

CV: Greg Wright

Position Greg Wright is an investment advisory director at KPMG. He has almost 30 years of experience in the pensions industry, the majority spent in investment advisory. He is based in Birmingham, having built a team in Reading from 2012. Wright has advised trustees and sponsors on the full range of investment issues for defined benefit and defined contribution schemes, ranging from £5m to over £1bn. He also leads KPMG's fiduciary advisory team.

Previously Wright started with Mercer in 1990 as a graduate, advising clients on the actuarial side before moving to investment consulting in 1993 when he helped Mercer develop its business in the Midlands. He joined KPMG from Mercer in October 2008.

Ongoing oversight

KPMG also believes it is important for schemes to have ongoing oversight of the fiduciary manager. "If there is no independent opinion on how the fiduciary manager is doing and what's going on, there is a danger a scheme will stick with the wrong provider for too long," Wright cautions.

He is disappointed the CMA did not make this one of its requirements and not just because KPMG and other evaluators would benefit from such an edict. He firmly believes fiduciary managers need to be challenged on a regular basis to ensure they do not diverge from the scheme's mandate or investment philosophy. Without an independent (and knowledgeable) eye on the performance and actions leading to those results, the scheme could end up with something it was not expecting (and paying for it).

One KPMG initiative is to create a standardised database of past performance of fiduciary managers, including things like forward liability hedging. The idea is to pull together the answers to standard performance questions the industry commonly in one place in a format that allows for comparison and interpretation. Wright hopes this will make it easier to create short lists for schemes as well as keep track of material changes at fiduciary managers.

"How do you interpret information? How do you know if someone is good or bad? Is someone skilful or is there a weakness in the process they use that is causing underperformance? Just seeing the numbers doesn't give the whole picture. You need to understand what's behind the number, to do some research in order to interpret the numbers," explains Wright.

Creating a way to give easy and up-to-date comparisons is something Wright thinks will benefit trustees as well as the fiduciary managers themselves.

He stresses that past performance of a fund product alone without an understanding of how that performance was achieved is a bad idea. If a fiduciary provider has patchy performance over a few years, trustees need to understand why that has happened. "You can look at the numbers, but you need to interpret and explain them. There should be a sensible assessment and that means research into fiduciary providers," he declares.

Wright also believes that the start of the entire process of choosing a fiduciary manager has to begin with the right tender document. To help make this process as "slick" as possible, KMPG's fiduciary advisory arm has selected standard boiler plate questions about a firm that need not be included. Such questions, says Wright, do not need to be asked for in the request for proposal (RFP).

Most of these questions relate to operations and organisation and are easily standardised and rarely change once details are given. By taking these questions out of tender documents, fiduciary managers and trustees can focus on what really matters: investment philosophy, beliefs and the details of how to achieve the scheme's objectives.

The selection process should focus on understanding how the portfolio works, its costs and charges, liquidity constraints and how to work with trustees. "The tender should not be about standardised questions. Those you can have in a common database," says Wright.

He thinks this approach is economical. "We want to be accessible to schemes of all sizes. If we have 20 or 30 tenders to do, we need a process otherwise the danger is that trustees will not be able to recieve meaningful quotes from providers and fiduciary managers will be put off the tendering process if they have to fill out a 100 page report. The onus is on us to make the process as efficient as it can be," says Wright.

Part of that effectiveness is making sure the mandate is defined properly and is sent to the right fiduciary managers for a response.

Size shouldn't matter

Unlike some evaluators, Wright is adamant that the size of the scheme should not affect the ability of the fiduciary manager to take a customised approach. "Relatively small schemes - those under £50m - don't have to have an off-the-peg solution. Every client has bespoke requirements," he argues. While the construction of portfolios could have similarities risk tolerance, for example, will be different. "There can be customisation," declares Wright, adding, "You can have similar ingredients, but the recipe puts them together in different ways."

Once the fiduciary manager is chosen, Wright says it is important to continue to monitor and provide trustees with an independent evaluation of their performance. Schemes have different ways they want to be kept informed, he notes. Some focus on short quarterly updates. "This we can do with a traffic light summary: green, amber and red looking at key points such as whether performance is on track or major changes to personnel or the portfolio. There are 10-12 factors we would take into consideration. We will always provide a view and information so trustees that there has been an independent assessment and that discussions have taken place," explains Wright.

Some clients want more detailed annual assessments with added comments on things like industry trends and what other schemes are doing. Others look for detailed information every quarter.

While most schemes appoint only one fiduciary manager, there is a bit of a mix and match emerging with a hybrid of advisory and fiduciary. The question, asks Wright, is at what point does a firm stop advising and become a fiduciary manager or vice-versa.

At the same time as the market matures, adding different products and asset classes is becoming standard. Providers are keen to have a wide range of products and not just equities and bonds. They are developing products that tick the right boxes for running an equity mandate with an ESG overlay.

"The toolbox is getting broader and deeper all the time for fiduciary managers and at the same time trustee boards are demanding more from managers," explains Wright, adding "We are seeing increasing sophistication and a wider spread and range of providers and products."

Short term the industry could be looking potentially at a lot of churn, says Wrights. "We estimate that around 200 schemes did not tender in the way CMA wants so they will need to go through the exercise and re-tender." While this will provide schemes with some options, it could lead to transition to another provider. That can be both costly and time-consuming and is something that needs to be closely managed, advises Wright.

KPMG has a specialist transition team it uses to help schemes that decide to move to a new fiduciary manager. The transition team is there to ensure that market exposures are protected and physical holdings are unwound over as short a time frame as possible. The aim is to keep costs low and protect the portfolio.

At the end it is up to the schemes to choose the right evaluator to help them over the entire process from tender (or re-tender) to selection and oversight. Wright admits that pitching for this work is important. "We take our presentations to trustees seriously. And we are happy to work with funds of all sizes. The schemes need to know how we operate and we need to understand their process and decision-making."

Even before getting to the fiduciary management selection process, schemes will have to make decisions about choosing the right third-party evaluator. As that market expands, it will become even more important for schemes to find an evaluator they can work with and at a price they can afford. Wright hopes KPMG will be one of the preferred providers as the market continues to expand.

The fiduciary evaluators

Barnett Waddingham's Peter Daniels

Hymans Robertson's Mark Baker

IC Select's Peter Dorward

KPMG's Greg Wright

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