Patrick McCoy says the CMA's proposal for all fiduciary management appointments to go to tender will only work if pension funds take independent investment advice
The Competition and Markets Authority (CMA) has revealed that on average pension funds pay 10 times more for fiduciary management (23 bps) compared to investment consulting (2 bps). Profit margins are broadly the same in fiduciary management and investment consulting. Therefore, an investment consultant steering clients into its own fiduciary management service will make 10 times the profit in pound terms. The temptations to steer clients in that direction is far too great for any firm to be able to manage that conflict effectively.
Not only do the fiduciary managers make more money, but the CMA has shown that the total cost of using a fiduciary management approach is 50% more expensive than investment consulting. So these decisions need to be taken seriously. John Wotton, chairman of the CMA review, said: "Our greatest concern is the fast-growing fiduciary management market... Some pension schemes may benefit by outsourcing investment management to a fiduciary manager but the service costs substantially more…Moving to fiduciary management is a big change in how a pension scheme is run and pension trustees need to exercise sufficient care and attention".
Those firms offering both investment consulting and fiduciary management have vehemently denied steering clients in the direction of fiduciary management. Year after year they have claimed that they make sure all pension funds being flipped into fiduciary management go through a competitive tender process. However, the CMA has revealed this is not the case, in fact nowhere near it. The CMA "found that tender rates were lower among customers who bought fiduciary management from their existing investment consultant: only 14% of these were formally tendered". Not surprisingly, trustees are also concerned. The CMA has produced analysis that shows 74% of trustees that had a view thought steering towards fiduciary management was a problem.
The CMA said "We have found that [firms offering both investment consulting and fiduciary management] have strategies and financial incentives to sell fiduciary management to their existing clients". There is nothing wrong with cross-selling additional services to clients. Where it becomes a problem is when the financial incentives are so significant, and the existing investment consultant has the ability to shape the advice and influence the decision-making in a way as to bias the debate.
So what's the solution? The CMA's provisional decision is to require all fiduciary management appointments (both full and partial) to go to tender and for those that didn't do it at outset, to do it in the next few years. This is a great solution. However, it will only work if pension funds take independent investment advice and this should either be a requirement or actively encouraged by The Pensions Regulator.
For partial delegation (which is where the investment consultant has sold one of their own funds for the management of part of the assets), the existing investment consultant surely can't run a tender to compare its own product to others in the market. You may laugh at the thought, but currently investment consultants provide advice that their own fiduciary management products are "appropriate" when giving the required Section 36 Pensions Act advice. So, the solution must be to require or encourage pension funds to obtain independent investment advice on the tender exercise and the giving of the "appropriate" advice. This should also apply to full fiduciary management appointments. The CMA is asking trustees to challenge their advisers more and in the case of appointing a fiduciary manager they need to obtain independent investment advice to do this effectively.
Patrick McCoy is head of investment at XPS Pensions Group
The views expressed in this article are the author's own and not necessarily the views of XPS Pensions Group as a whole.
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