The long-awaited Competition & Markets Authority (CMA) investigation into investment consultancy and fiduciary management has been completed and its final decision has been published.
All in all, to me, the CMA seems to have reached a pretty balanced assessment of the market and put forward some helpful remedies to the perceived problems. It is not the “all out attack” on the big three (and soon to be bigger in the case of Mercer) that some were hoping for (but, was never going to happen). Nor is it a full endorsement of all current practises and so some things will change.
The investigation focussed on two areas – investment consultancy and fiduciary management. To be clear, we provide both of these services to a number of trustee boards of defined benefit pension schemes.
The main findings of the investigation are that there is a low level of engagement by some pension trustees in choosing and monitoring their provider. The CMA also found that firms (like us) which provide both investment consultancy and fiduciary management have an “incumbency advantage” when fiduciary appointments are made.
The CMA also found that there may be high costs of switching providers and that many trustees find it difficult to access and assess information in relation to the fees of their existing fiduciary manager. My own experience is that the cost of switching investment consultant is often much lower than the costs of switching other services in our market (such as pension administration). Switching fiduciary manager may well be expensive due the potential costs associated with buying/selling investments, so the costs for these need to be understood as far as possible, before any switch is made.
I have also found the investment services market one of the more fluid areas of our industry, and one which is relatively easily accessible by new providers. I am further confident that all of our trustee clients have complete visibility and transparency of the fees paid and the services we provide.
So, what is the CMA going to do?
Following its investigation, the CMA is proposing to:
- Require competitive tenders for first-time fiduciary appointments (or within five years, if the appointment was made without a competitive tender being undertaken);
- Require investment consultants to separate marketing of their fiduciary management and to inform customers of the above tendering requirements;
- Require fiduciary managers to provide better and comparable information on fees and performance;
- Require trustees to set objectives for their investment consultant; and
- Require investment consultants and fiduciary managers to report on performance using basic minimum standards.
All of the above seem to be reasonable requirements of trustees and consultants/managers. Indeed many schemes will already meet many or all of these requirements. My main concern is around the belief that “performance information” can be comparable. As stated in our response to the consultation, given the bespoke nature of pension schemes and the strategies put in place, applying a standard will prove difficult.
The report asserts that there is substantial confidence that a common standard could be implemented, but we still believe that it will be very challenging to agree a transparent approach to measuring performance on a standard basis. There is a real danger that a common standard will fail to identify genuine outperformance (or underperformance) and that it will actually drive inappropriate behaviour, as some providers might be tempted to adjust their strategies artificially. We will, of course, work within the parameters that emerge while sticking to our principles to achieve the best outcomes for clients, and we will be very interested to see how a genuine “apples vs apples” comparison standard can be put in place.