5 June 2020
Joel Hartley looks at the key questions that trustees should be asking their fiduciary managers to ensure they are getting quality service.
A few years on from the explosion in UK fiduciary management services many on the receiving end of it might be wondering whether it's worked.
The industry has also come through a lengthy Competition and Markets Authority (CMA) investigation, so many trustees will be taking stock of what this means (spoiler - not very much). I want to share my perspective on fiduciary management, including some observations that aren't talked about very much.
At Lane Clark & Peacock (LCP) we don't offer asset management - we're enthusiastic advocates of independent investment advice. We do see some benefits of fiduciary management and support trustees in selecting and overseeing it. We research and buy-rate fiduciary management products where we're comfortable recommending them to our clients - it makes no difference to us if good funds are run by "fiduciary" managers or "regular" ones.
So we have extensive experience working with all types of asset managers and identifying the strongest offerings regardless of how they are marketed. If you haven't already, you should take stock and properly test whether fiduciary management has delivered for you. These are some areas that I see as often under-appreciated:
Did your FM deliver in a testing first quarter? Not sure? They seemed to think so? If you don't know I sympathise but it illustrates the importance of an independent, expert opinion. Some acted quickly and rebalanced into opportunities. Others were reactive, some did little. Was your "outsourced chief investment officer" proactive in sourcing more cash to help you deal with a contribution holiday? Did they engage to consider whether your covenant still supported their investment strategy?
A good fiduciary management service must reduce the governance burden. But the real-world experience may still involve quarterly investment meetings and presentations, which won't free up lots of trustee time to focus elsewhere. Even with fiduciary management, trustees sometimes want to own big decisions like hedging levels and asset allocation, so here fiduciary management becomes just a manager selection service. Fiduciary management sounds trendier than "fund of fund manager" or "sole asset manager" but the two may not be so different.
Oversight can be found wanting from the all-important investment perspective. We've seen recent bulletins from fiduciary managers all setting out how they've helped their clients successfully navigate recent market volatility. Trustees cannot know what a fair reference point is (as can be true with an advisory model too). Proper asset manager oversight requires expert investment input.
Fiduciary managers claim to offset their own fees by negotiating lower underlying manager fees, but are you getting a good deal? This is a key plank of the fiduciary management pitch so needs to be held up to scrutiny. It's competitive out there, and independent advisers representing large pools of assets may command similar or better fee terms by negotiating client assets as a single block too. There's also a benefit in comparing the whole range of investment solutions so you understand what you're paying and can make an informed value judgement.
The conflict of in-house fiduciary management funds versus third-party managers may not always be a fair fight. It's an open secret that managers have been put forward in unfair selections as "cannon fodder" against in-house fiduciary management funds. The recent CMA remedies should help reduce this behaviour but for mandates representing less than 20% of assets it can still happen. So be wary of situations where any adviser puts forward their own products.
As schemes approach an endgame, the fiduciary management model comes under pressure and may amplify potential conflicts. Paying two layers of manager fees isn't good value for lower-risk bond investments and passing assets to insurers loses the fiduciary manager their asset-based fees. While asset-based charges have increased revenues for combined investment consultants and fiduciary managers, does their workload and value increase similarly? It's hard for customers to assess this and of course asset management needn't be charged by reference to asset size.
Like all forms of asset management and advice, the benefits of fiduciary management sold initially might not always be received. Any cost and value implications must be tested carefully, and my experience suggests smaller, immature DB schemes should get more out of full fiduciary management than larger or mature pension schemes.
If you're considering or already use fiduciary management, you may be reviewing this soon. You may have seen solid performance thanks to sound hedging - that's great, but it may be par for the course. Know the questions to ask to assess whether you're receiving the full benefits, avoid the pitfalls, and get better value as your scheme matures. If your fiduciary manager is failing to deliver it may be time to reconsider.
This article was originally published in Professional Pensions