A ground-breaking disclosure standard to help trustees compare fiduciary managers in the selection process has been unveiled, putting an end to three years of talks.
The breakthrough was reached after the standard developed by IC Select received the backing of 14 fiduciary managers in the UK market, including the ‘big three' consultants Aon Hewitt, Willis Towers Watson and Mercer.
The IC Select Fiduciary Management Standard, which covers around 99.9% of fiduciary assets, and 520 pension schemes with around £84bn of assets under management, was developed in response to concerns that managers cherry pick performance data to look attractive during tenders.
At the same time, trustees have struggled to compare managers because they ask each of them to take different approaches to hedging and allocating assets.
The standard is designed to help overcome these issues by enabling trustees for the first time to obtain consistent performance information when selecting a fiduciary manager.
Managers will provide data on composite portfolios as if they kept full discretion to manage, and hedge, scheme assets. Such portfolios can be directly compared to enable trustees to assess the skill of managers.
As the fiduciary management market has grown by around 25% year-on-year since 2013, it has also attracted regulatory scrutiny, particularly where the service is provided by the big investment consultants. Critics have also argued the selection procedures lack transparency and deliver performance disappointments.
The initiative is supervised by the Fiduciary Management Performance Standard Steering Group, comprising eleven independent members. The standard is led by founder director Roger Brown, and managing director Peter Dorward.
The other providers backing the standard are BlackRock, Cardano, Charles Stanley, Goldman Sachs Asset Management, JLT Investment Solutions, Kempen Capital Management, Legal & General, P-Solve, Russell Investments, Schroders and SEI.
The process started around four years ago when IC Select found that when clients conducted selection exercises and received data sent by fiduciary managers, there was inconsistency in the way it how it was presented and calculated.
"So it was very difficult to assess whether what we were seeing was what we understood in the makeup of the data," says Dorward. "There was a risk that managers were simply cherry-picking their best performance rather than showing performance for clients that was more closely matched to what they were pitching in for."
That was the starting point of the debate and discussions with managers. Once there was recognition of issues in transparency, then discussions were "very positive" right from the start with the majority of the managers, "although not all".
The standard had been due to launch at the end of last year, and in January 2017 it emerged that half of fiduciary managers had yet submitted initial data for the performance standard.
The subsequent scrutiny of fiduciary managers by the Financial Conduct Authority (FCA) was clearly a catalyst in progressing the standard's development.
Dorward says there was clearly a lot of interest from managers as the FCA launched its asset management study, and subsequently referred the investment consultancy and fiduciary management sectors to the Competition and Markets Authority.
There was recognition that this wasn't going to go away, he says, adding that there has not been a reluctance from managers.
"The reality is that we have continued to press hard and develop the different elements of the standard, which takes time as we are not doing this for commercial benefit, but because it helps in our understanding of fiduciary managers alongside the due diligence we do as a business and also brings transparency to the industry.
"We have clients to provide services to and ensure quality, which has meant that discussions over the development of the standard have sometimes slipped. This is the reality of doing something so complex and has many stakeholders to bring alongside."
The difficult part was reaching a consensus on what it should look like. The FCA's referral of the market to the CMA helped that process, as one of the issues it flagged up was there was no consistent standard to measure a fiduciary or an adviser.
One of the major concerns among some fiduciary managers had been the use of composite data in league table format. IC Select has opposed performance league tables, given the wide swings of valuation from rises or fall in interest rates and the limited value of tables in forecasting future performance. IC Select is not mandating what the composites should look like, because it believes this is for the managers to determine. Instead, managers will compile their own composite data, using IC Select's guidelines.
While fiduciary managers will still look after portfolios in line with trustee requirements, schemes can request composite data in order to make comparisons.
The firm has laid down a recommended structure for composites that arrive from putting clients into various different mandates that range from liabilities plus 0.5% right the way through to liabilities plus over 3.5%. It also covers mandates that are fully discretionary and totally unconstrained. This is so that managers can also include clients are sitting in the relevant box right across the range of clients they have. That's been a key element of the conclusion of discussions with the managers, says Dorward.
He compares the liability benchmark to the Global Investment Performance Standards (GIPS) where standards are laid down through the CFA Institute for strategies put together by asset managers.
"We believe that the FCA will say - as it did for the GIPS - that the market will find its own level eventually," he says.
Over the years to come, he is "sure there will be different aspects of the standards that will be refined".
How to use it
So how can trustees use the standard in practice?
"The standard will give trustees confidence that what they're seeing is on a consistent basis, and they can therefore ensure the performance record they're looking at is the most appropriate for them to consider aligned with their own aspirations. It ensures they will ultimately select the right manager for what they're trying to achieve," says Dorward.
The trustees would go to a manager and ask for a list of the composites they produce, which allows them to produce the most appropriate composite for them, such as liabilities plus 0.5%, and see how that manager has performed for all their clients in aggregate against that target. "They may also want to look at the composite that's totally unconstrained, so they can see how the fiduciary is performing when there are no constraints laid down by trustees in aggregate. The composites will be presented in a standard format that will give performance and risk data in terms of volatility, and maximum drawdown over a period, and see how the manager performed over a year-by-year basis, as well as on a three-to-five-year basis."
However, the standard, which is only designed for the point when managers are being considered for selection, will not significantly change what pension fund clients see on an ongoing basis.
When IC Select carries out oversight of fiduciary managers for its existing clients, it finds trustees are being given a lot more in-depth information as part of their regular quarterly reporting. However, Dorward does say that amount of information clients can and should get on an ongoing basis can be improved significantly.
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