Monday, 20 November 2017

    Why oversight needs to be looked at

    Trustees cannot just take on a fiduciary manager and leave it at that - they still need to be involved, says Gill Wadsworth

    More than four-fifths of pension schemes using a fiduciary manager have no formal, regular oversight of the service, according to a 2016 survey by consultancy KPMG.

    This means that although a solitary provider is responsible for selecting asset managers, tactical asset allocation, overseeing the investment strategy and all the myriad tasks that come with these roles, trustees are not keeping an eye on what is going on. The Financial Conduct Authority (FCA) is not happy about the lack of independent oversight of fiduciary managers and believes this area is one of the least transparent in asset management, especially on fees.

    Anthony Webb, principal consultant in KPMG’s investment advisory division, suggests some of the reluctance to hire third party independent monitors maybe because many fiduciary managers have employed their incumbent consultant in an implemented role. At the time of writing, the FCA was poised to decide whether to refer investment consultancy services to the Competition and Markets Authority.

    Webb says: “There’s sometimes a perception that moving to a fiduciary management arrangement is essentially doing everything the same as before. Giving control of investment decisions to the investment consultant might feel like a small change but it is a large step in terms of how the scheme is run.” There are numerous benefits to having independent oversight for fiduciary managers but inevitably schemes will be concerned about cost.

    However, advocates of independent oversight argue that this reluctance is a false economy since advisers should be able to keep the considerable fiduciary management costs under control. Peter Dorward, managing director at IC Select, which provides fiduciary management oversight, says his firm has saved one scheme as much as 75% in fiduciary management fees.

    He says: “Three or four years ago trustees tended to think performance fees were a good idea since they would align the fiduciary manager’s interests with the trustees’. We would argue that if the fiduciary manager’s interests are not aligned with the client’s anyway, there’s a serious issue.”

    For independent oversight to happen, fiduciary managers need to provide adequate reporting. While an independent adviser should be better placed to assess these reports, Carl Hitchman, head of fiduciary management advisory Stamford Associates, argues it is down to the fiduciary manager to improve client communications.

    He says: “It is incumbent on managers to provide the reporting that clients need; it should not be like drawing blood out of stones to get information. We are reviewing our reporting so that clients can look beyond the [performance] numbers and really lift the bonnet on our processes.”

    Being able to see the inner workings of the fiduciary management process is helpful if trustees are to agree changes in investment strategy. However, unless they are investment experts themselves, a third party is useful in advising whether such change is welcome.

    Given the level of responsibility the fiduciary manager has for the scheme’s investment success it makes sense to ensure they are doing that job properly. Trustees are obliged to have support in choosing conventional asset managers, leading KPMG’s Webb to predict the FCA will impose a similar framework for fiduciary managers.

    If their hand is not forced, pension schemes should still consider independent oversight, since even though a fiduciary manager has control of investment decision making, it is still the trustee who carries the can if it all goes wrong.

    This article first appeared in Engaged Investor’s Investment Diversification research report.  Click here to read and download the full report

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