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Fiduciary management
– the fog is starting to clear

Our viewpoint

Last November, the Financial Conduct Authority (FCA) issued its interim report on the asset management market, and amongst the findings it declared that “Fiduciary management fees appear to be one of the most unclear parts of the asset management industry”. Quite a damning statement, if you stop to think about it, considering the competition for that title.

And this lack of transparency adds to the main concern with fiduciary management…the unavoidable conflict of interests. The FCA also noted its concerns on these conflicts which are “…exacerbated because investors cannot assess whether the advice they receive is in their best interests”.

The fallout of these concerns (along with others) is that the FCA has proposed to make a Market Investigation Reference in relation to the provision of investment advisory services. To be clear, this affects the whole industry, and not just those who are conflicted by offering investment products alongside their investment advice.

Aon Hewitt, Mercer, and Willis Towers Watson, as three of the major players in this market, recognise that they need to do more to help address the conflicts within fiduciary management.  They went back to the FCA with a joint proposal, in order to avoid the proposed referral to the Competition and Markets Authority (“CMA”). Interestingly, while those proposals were submitted confidentially earlier this year, the FCA published them in June as part of its final report, along with its reasons for provisionally rejecting them. They certainly make for very interesting reading for trustees who have appointed their consultant as their fiduciary manager, or are considering doing so.

What were they proposing? Well, amongst other things, that the fiduciary managers would each make detailed performance information publicly available to help clients compare them against one another; and that they would provide a fee statement to clients each year, splitting out the fees that clients have paid, and comparing those fees to what was initially promised.

This is good stuff – it should help to raise the bar when it comes to transparency around what clients are getting and what they are paying. It seems reasonable to me for clients to be asking for this type of fee analysis from their fiduciary manager now. 

On the performance data, however, there are many challenges around getting meaningful information to enable a fair comparison, but no doubt something will emerge in the near future – it will need to if clients are to compare apples with apples.

They also proposed that, before accepting a fiduciary appointment, they would tell clients that they should consider a competitive tender exercise, and that they would also inform clients after five years that they should review their fiduciary services. Again, positive steps, and reinforcing that it is best practice to get some independent advice on these arrangements from time to time.

Of course, a downside of independent advice is additional cost, although the reality is that this cost typically very small compared to the annual fees paid to the fiduciary manager. And, if done well, those using independent oversight should get better value for money out of their fiduciary management arrangements.

While getting independent advice is not strictly a “must-do”, I’d suggest that, given the issues raised by the FCA review, trustees should start to consider independent oversight to be a necessary and valuable element of fiduciary management, rather than an optional extra. The Pensions Regulator is also suggesting the same – more from my colleague John on that here.

I will be discussing fiduciary management (the pros and cons) at our upcoming annual pensions conference

Read our full response to the FCA’s final report