The fiduciary market is becoming less murky, but the FCA is right to raise concerns, finds Maggie Williams

According to KPMG’s 2016 UK fiduciary management report, released last week, 33% of fiduciary management deals done this year were advised by a third party. While that’s an improvement on the 23% advised independently in 2015, it’s still hardly proof of consistent due diligence. Only 13% of schemes monitor fiduciary management externally, says KPMG – on a par with last year.

FSA building

The same report says that there are now 459 full fiduciary management mandates in the UK, compared to 211 in 2013. Those full mandates equate to £71bn of assets under management in 2016 – more than double the £29bn managed in full mandates in 2013.

It’s no surprise the FCA has turned its gaze onto fiduciary management practices

With the size of assets in fiduciary management mandates now reaching a different scale - but the scrutiny applied to them still relatively minimal - it’s no surprise that the Financial Conduct Authority (FCA) has turned its gaze onto fiduciary management practices– and investment consultants’ role within it.

In its recent interim report into the asset management market, released on 18 November, the FCA announced that it will consider a market investigation report into investment consultants. But even the regulator itself admits that assessing investment consultants is not a straightforward process. The report refers to a ‘credence good’ – in other words, it is hard to assess the quality of consultants’ advice and its effect.

Investors often evaluate factors such as the speed with which consultants respond to queries

That is partly down to the “limited availability of transparent and comparable data on the performance of investment consultant advice”, and a focus on the wrong variables: “Investors often evaluate factors such as the speed with which they [consultants] respond to queries…and their willingness to be flexible in their reporting to meet trustee needs. Consultants recognise this and often respond to it by competing on these factors more than the quality of their advice,” concluded the FCA.

A further fiduciary management market report from LCP released earlier this year, showed that 65% of schemes using a fiduciary manager have been doing so for less than five years. Many of those may therefore not yet even be able to assess whether their manager is adding value to the scheme.

We note that the FCA has not found any evidence of failure to manage potential conflicts

The biggest investment consultants have been quick to welcome the FCA’s review, while insisting that transparency already sits at the heart of what they do. “Clients have decided to work with us as they recognise that our size provides a range of services and choice that may not be available elsewhere,” says Tim Giles, senior partner and head of UK investment consulting practice at Aon Hewitt. “We firmly believe that all advisers should be transparent in their approach to managing conflicts. We are, and we note that the FCA has not found any evidence of failure to manage potential conflicts.”

It would be easy to say that trustee practice in evaluating fiduciary managers and/or investment consultants is as important as improving the transparency or accountability of the providers themselves. The 13% of schemes that use a third party to monitor their fiduciary manager is worryingly low. But there is an obvious side effect to rectifying that: third party oversight is another potential fee burden to the scheme. Ed Francis, EMEA head of Investment at Willis Towers Watson, cautions against introducing further fees for schemes: “As the FCA considers potential remedies, it is important that any further regulation does not fall onto investors in the form of higher costs.” 

As the pensions industry more broadly looks at ways to reduce the cost burden on DB schemes, the significance of fiduciary managers is likely to expand further. That makes the need for proper due diligence and robust on-going monitoring, both from the regulator and from schemes themselves, more important than ever.