Here comes the CMA…
should consultants be worried?
15 September 2017
Yesterday’s announcement from the FCA referring investment consultancy and fiduciary management services to the Competition and Markets Authority (CMA) is a first. The FCA has never referred onward to the CMA before, so what is it about investment consultants that has it so worried?
The investment consultancy industry is not particularly big, total revenues are around £240m, but it is very influential. It advised on around £1.6trn of assets, much of which is invested in the UK economy. The FCA is, therefore, rightly concerned that clients get a good service from their investment consultant.
A lot of our advice is about helping our clients make good decisions in two areas: asset allocation and manager selection. It’s long been recognised that asset allocation has a far bigger impact on returns than which manager you select. This relative importance has not been reflected in the degree of attention given by regulators. Incongruously, we can provide asset allocation advice without direct regulation by the FCA, but to deliver manager selection advice, we have to meet many more regulatory hurdles. So, for the sake of the reputation of the industry, this needs to be made more consistent and the FCA is, separately to the CMA review, looking at this issue in more detail.
The FCA has highlighted that pension trustees rely heavily on investment consultants but only have limited ability to assess how good that advice is. This has been something we’ve been thinking a lot (in fact my colleague Clay Lambiotte wrote a blog on this a few months ago – read it here). Our general consensus is that, in the narrow sense of a financial outcome, measuring whether advice is good advice is indeed hard and it’s even harder to measure advice a quantitative way. So we will be interested to see what the CMA has to say on this.
Alongside concerns about a high level of concentration with the largest three firms, and barriers to newer consultants entering the market, the FCA also highlighted conflicts of interest with “vertically integrated business models”. This is referring to where investment consultancies also provide fiduciary management.
In this area, I think the involvement of the CMA is a big positive. Investment consultancies should be seen to be managing any conflicts of interest that might exist- and those firms with this vertically integrated model need to do the most to show they are acting in their clients’ best interests. You can read more from my colleague Rob Guthrie on this here. Transparency will make sure this industry moves in the right direction, and pension trustees and sponsors are going into fiduciary management arrangements with their eyes open.
The next few years could be a defining time for our industry. I, for one, welcome the review by the CMA and hope its final actions and recommendations will make sure our clients feel confident, supported and empowered to make good decisions about the future for their members. I know as a firm, we look forward to working with them to, ultimately, improve the quality of the service the industry provides.