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Investment Consultancy and Fiduciary Management Reviewed in the UK

Frequently asked questions on the conclusions and remedies

Pensions Corporate Consulting|Pension Board and Trustee Consulting|Investments

January 31, 2019

2018 saw the conclusion of a detailed Competition and Markets Authority review of our industry clients, we answer at frequently asked questions on the conclusions and remedies

2018 saw the conclusion of a detailed review of our industry covering both advisory and fiduciary management services.  Overall the Competition and Markets Authority found an industry that is functioning well, does not have excessive concentration or high barriers to entry and where participants are seeking to serve their clients’ best interests.  The fiduciary market continued to grow during the review, but at a reduced pace.  However we noticed a material uptick in interest in fiduciary management as the review came to a conclusion.

  1. Why was a review conducted?
  2. In 2015, the Financial Conduct Authority (FCA) initiated a review into the UK Asset Management Industry. The FCA looked at asset managers, investment consultants and other service providers and stakeholders. In relation to investment consultants and fiduciary managers the FCA concluded it was “unable to confirm its understanding of the competition issues in this sector...” and referred the sector to the Competition and Markets Authority (CMA) for a fuller investigation.

  3. What was the outcome of the review?
  4. The CMA published its Final Report ahead of schedule in mid-December.  It found an industry that is not highly concentrated and adds value to clients. It did however find some areas that could be improved.  A remedies package was established to address these.

    One of its main concerns was low levels of engagement. The remedies package looks to enhance engagement through implementing a mandatory tender regime and more transparent and consistent reporting to enable trustees to make the best decisions for their scheme members.  The full package is shown below.

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  5. What are the implications of the tender process for the appointment of a fiduciary manager?
  6. The remedy (which applies retrospectively) requires a competitive tender when first buying fiduciary management services. A substantial number of existing mandates in the industry will therefore be re-tendered in the coming years alongside the tendering of any new mandates. Only a handful of our clients appear to be affected by this requirement.  More guidance on tendering requirements will be made available by the Pensions Regulator (tPR).

  7. Does this mean I have to change my fiduciary manager? 
  8. No. There is no explicit requirement to switch providers. However, where a fiduciary manager is in place already and the trustees did not conduct a competitive tender exercise, there is action to be taken over the next 2 – 5 years depending on when the fiduciary manager was appointed. There are exceptions though:

    • Mandates that make up less than 20% of scheme assets will not need to be tendered
    • Mandates for in-house schemes – i.e. where the sponsor of a pension scheme has a fiduciary management arm.

  9. What has the CMA found in relation to conflicts of interest of providers who offer both advisory and fiduciary management services?
    • No evidence that firms are seeking to introduce fiduciary management services that are against their clients’ interests
    • However investment consultant – fiduciary management firms do steer advisory clients towards their own fiduciary management service. 

    We view fiduciary management as an extension to advisory services and the way in which we can add most value for clients. As with any commercial enterprise, there is an incentive to sell additional services to clients.  This applies to all providers including advice only organisations.

    The CMA has implemented a remedy which will ensure that materials produced by providers are clear on whether they are “advising” or “marketing”.

  10. How do you explain the CMA’s conclusion that investment consultants fail to add value after fees when selecting asset managers?
  11. The CMA performed statistical tests on the performance of all investment consultant asset manager recommendations. The recommended products appeared to:

    • Outperform benchmarks gross of fees to a highly statistically significant degree
    • Outperform net of fees, but not to a statistically significant degree.

    The evidence hasn’t clearly demonstrated whether providers collectively add value through this service.  We were not surprised by this conclusion.  The “average” investment consultant is unlikely to add value. However in its Final Report the CMA acknowledged, having carried out firm specific analysis, that there was evidence that “certain investment consultants..” add value for their customers in making manager recommendations.

    Our economic advisers prepared and submitted the tests on Willis Towers Watson’s asset manager recommendations showing outperformance of benchmarks net of fees at highly statistically significant levels.

  12. How do fiduciary managers measure performance?
  13. Performance should ideally be measured against the trustees’ overall objectives.
    For defined benefit pension schemes, this typically means progress towards a fully funded position.

    Fiduciary manager performance is typically measured as asset performance relative to liability performance which, if positive, should lead to funding level progression.

    However, headline performance figures do not always allow a full understanding of whether a provider has done a good job or not. One of the most important aspects to consider alongside performance is the level of investment risk that is being run. Therefore a volatility measure should also be assessed.

    One of the remedies proposed by the CMA was a standardised methodology on reporting past performance of fiduciary management to prospective customers (remedy 6). The industry has been working on this for some time and has made significant progress on finalising a common methodology which includes showing performance of assets relative to liability returns and risk measures for clients with different risk and return objectives.

  14. How is Willis Towers Watson addressing some of the concerns around fees raised in the report?
  15. Most of the concerns raised have already been dealt with by MiFID II regulation introduced in early 2018. We aim to provide complete transparency on fees to all of our clients and prospective clients and we are pleased that the CMA is mandating that best practice becomes normal practice.

  16. Is fiduciary management only suitable for small schemes with limited resources?

No. We have a range of different fiduciary mandates from c.£50m to multi-billion pound schemes. Fiduciary Management is a governance arrangement that allows real time portfolio management and allows the trustees to focus on the material and important aspects of their role - strategic issues. It also allows trustees to monitor its providers more effectively given there is clearer accountability.

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