The Financial Conduct Authority (FCA) has expressed “concerns” at the way the UK investment consultant market operates.
The watchdog’s interim findings of its market study into asset management revealed a failure by consultants to identify outperforming managers as well as conflicts of interest in their business models.
It said: “Investment consultants undertake valuable due diligence for pension funds but are not effective at identifying outperforming fund managers. There are also conflicts of interest in the investment consulting business model which require further scrutiny.”
The report also noted the consultancy market is “relatively concentrated”, with the three firms accounting for around 60% of the total.
And it identified a further conflict of interest when investment consultants accept hospitality such as concerts and sporting events from asset managers, which it considered could result in “poor outcomes for end investors”.
The FCA has proposed to consult on whether to refer the investment consultancy industry to the Competition and Markets Authority (CMA).
It also proposed the need for greater and clearer disclosure of fiduciary management fees and performance.
“Investment consultants are expanding into fiduciary management,” the FCA said. “Fiduciary management is a combination of advice, governance and carrying out investor instructions. This means these consultants are both distributors for – and competitors to – asset managers.”
Aon Hewitt welcomed the review as a “balanced response to improve competition within the asset management market”.
Senior partner and head of UK investment consulting, Tim Giles, said Aon Hewitt is able to demonstrate how its services improve outcomes for its clients.
He added: “All providers and decision-makers in the market have potential conflicts. Our relationships are built on trust so we take all possible steps to understand our clients’ needs and to manage our potential conflicts. We firmly believe that all advisers should be transparent in their approach to managing conflicts. We are, and we note that the FCA has not found any evidence of failure to manage potential conflicts.”
Speaking about competition in the industry, Giles added: “On the issue of competition in the advisory market, it is clear that we represent a large part of it – but that is because clients have decided to work with us as they recognise that our size provides the range of services and choice that may not be available elsewhere. Our clients choose between us and a wide range of competitors in the market.”
Punter Southall head of investment consulting, Danny Vassiliades, described the review as “important and necessary”.
He added: “The FCA is right to highlight the positive role of investment consultants, but also to shine a light on what are clear questions and concerns for parts of this market.
“There is a clear requirement for more competition in the investment consulting market. Currently, the industry is dominated by three large providers. We believe this has a number of negative consequences for pension schemes and the market more widely.
“We welcome any action that increases the level of competition in the market. Specifically, we encourage the FCA to consider in more detail ways in which schemes can assess the performance of their consultant and determine whether their fees have been justifiable.”
Willis Towers Watson meanwhile, also welcomed the review with EMEA head of investment, Ed Francis, saying the firm had long been a vocal supporter of increased regulatory oversight of the investment consultant industry.
He added: “As one of the largest fiduciary managers in the UK market, we are acutely aware of the need to provide clients with an unrivalled level of transparency on fees and performance, enabling them to make an informed decision on achieving the best outcome for members. As such, we fully support transparency, measurement and the reporting of meaningful performance figures for fiduciary managers.
“Earlier this year, we took the step of disclosing figures showing the performance and track record of mandates run on a fiduciary management basis to help advance and improve industry practice. The figures clearly demonstrate that fiduciary management can materially improve funding positions and returns for schemes, while lowering volatility through a variety of market conditions.”
