Breaking the stigma: addressing conflicts in fiduciary management

Surveys show a low number of pension schemes taking independent advice when selecting a fiduciary manager. But is that really the case? And does it actually matter?

Fiduciary management (FM) continues to gather UK pension scheme assets. According to KPMG’s latest survey, the discipline has seen nine consecutive years of growth and now accounts for £123bn of scheme assets under management across 719 mandates – 459 full and 260 partial. In the past six months the pension schemes of McDonald’s, electrical engineering firm Sevcon and the University of St Andrews have passed  investment decision-making to fiduciary managers, all citing governance reasons for the decision. St Andrews said it wanted to get the best ideas and expertise into the portfolio without the need for the trustees to select, review and monitor multiple managers. For Sevcon, it was about stabilising volatility in its funding level and having the right investment managers in place to do that. McDonald’s meanwhile, said FM would enable the trustee directors to focus their time on decisions that matter most to the outcome for members. However, despite the uptick in mandates, there remains a lack of schemes going out to the full market when tendering managers. The KPMG survey found 33% of new appointments in 2016 were advised by a third-party compared to just 23% in 2015.  However, the percentage of schemes using an independent provider to monitor their FM mandate was a lot lower at just 13% in 2016.GREATER DUE DILIGENCE Despite KPMG’s findings, it appears that schemes’ overall level of due diligence when selecting fiduciary managers has actually jumped up a notch over the past year. Aon Hewitt’s latest fiduciary management survey found 67% of the 250 DB schemes it quizzed used a beauty  parade or site visit when appointing a manager, while 55% used formal RFPs. This was up slightly on the year before when 65% opted for a beauty parade and 35% chose a site visit. According to Sion Cole, partner and head of European distribution at Aon Hewitt, the results show schemes are beginning to take a thorough approach to selecting a fiduciary provider. “To put this in context,” he adds, “80% of our new fiduciary mandates over the  past 24 months have been won from a full competitive pitch process.” This chimes with the experience of  Mercer Investments principal Tim Banks who, speaking at PI’s fiduciary management roundtable (see p4), said every sales process Mercer now goes through is an open tender. “It may not have been the case four years ago, but it is today,” he added. Anthony Webb, head of fiduciary research, investment advisory at  KPMG, believes the percentage of  appointments advised by a third-party will creep up from its current low base. Webb believes this is because trustees now have a better idea of their limitations and recognise that they cannot do adequate manager selection and monitoring themselves. He adds the low numbers of third-party advice can be explained by two commonly held perceptions among schemes. Firstly, some schemes don’t appreciate that moving into a fiduciary mandate is a big change; this is particularly the case with schemes moving into a mandate with their existing supplier. “We would disagree with that because it does have big implications for how your scheme is run,” he adds. Secondly, Webb claims there is a perception among some schemes that bringing another party into the relationship can add complexity and more cost – this is a bigger issue for smaller schemes where the cost is a larger proportion of assets.CONFLICTS An increasing level of due diligence is a promising development for the industry, but FM is still struggling to break free from the stigma of conflicts of interest and lack of performance monitoring inherent in the industry. The Financial Conduct Authority’s (FCA) industry-rocking interim report on asset management, published late last year, highlighted “concerns” over the need for greater and clearer disclosure of fiduciary management fees and performance, especially from investment consultants. As such, the watchdog is consulting on making a market investigation reference to the CMA on the investment consultancy market. The report said: “We have concerns about conflicts of interest that arise in fiduciary management, which is increasingly offered by investment consultants and fund managers. These issues are exacerbated because investors cannot assess whether the advice they receive is in their best interests.” The ‘flipping’ of traditional consulting mandates into fiduciary ones is taking place and there is no doubt investment consultants with FM operations are continuing to eat into asset managers’ territory. Indeed, KPMG’s report highlights that consultants still own the lion’s share of UK FM mandates. It found with regard to full mandates in 2016, consultants ran 339 of them, 74 were run by specialists and 46 by investment managers. In addition to conflicts, the bespoke nature of fiduciary makes it difficult to truly measure success. In terms of monitoring a FM mandate, providers argue it is like comparing apples with pears because each scheme has its own parameters, constraints, risk appetites and is on a different part of its journey. FM is also a relatively new discipline meaning many mandates have not been running long enough to adequately judge performance.