Why are some consultants failing to win the trust of their clients?
Consultants, asset managers and providers are converging in a turf war to win the trust and spend of the UK’s defined contribution (DC) schemes.
At least, that’s one theory which could explain the lukewarm satisfaction that the 150 schemes which responded to this year’s DC landscape survey reported. Almost a quarter of schemes (23%) said they were either “somewhat satisfied” or “dissatisfied” with their consultant’s services.
While that still means that an encouraging 77% of schemes are satisfied or better, it’s worth exploring why a significant proportion of schemes feel ambivalent or worse towards their consultants.
PI started at the horse’s mouth and spoke to two pensions managers who had said they were either “somewhat satisfied” or “dissatisfied” with their consultancies. Both commented on condition of anonymity.
“The consultant is already thinking about implementing a ‘solution’ before really understanding what the client really needs”
The first pensions manager said: “I assume part of [the lukewarm satisfaction levels reported] is the client’s scepticism about how much the ideas proposed from the consultant are for the benefit of the scheme and members, and how much is about the consultant meeting their revenue targets.”
The same manager continued: “Another element, again finance related, is how many consultants actually sit down with their clients off the clock to discuss and better understand what the scheme is about and what it really needs.
“Most consultant client conversations are ‘on the clock’ so the consultant is already thinking about implementing a ‘solution’ before really understanding what the client really needs. It is hard to get the right balance of individual advice at the price of an off the shelf solution. I’m sure consultants would say that they can give that to the clients but the clients wouldn’t pay for it. Time is money, and it isn’t cheap!”
The second manager said: “My scepticism about the consultant is based on lack of trust emanating from the constant attempts to sell ‘in house products’. I fully understand why they operate in this way and I would not want them to avoid telling me about new products and innovation but when it is their own product I instantly become suspicious.”
A changing environment
Why are some pensions managers feeling pushed to buy products by their consultants? One theory is that as pension scheme provision changes in the UK, so does the nature of the services they need. The sell side industry as a whole – asset managers, consultants, and providers – are changing their business models fast to stay relevant and ultimately, profitable.
“There are pressures on corporates’ bottom lines to make DC sweat”
This change is underpinned by the fact that DC schemes intrinsically require less external support than defined benefit (DB) schemes once did.
“The problem with pensions for all the consultants is that defined benefit is withering away,” says Michael Clark, an independent trustee and director of Clark Benefit Consulting. “All the cash that used to come into the business from the DB side – you can only do a de-risking exercise a certain number of time, you can only do a buy-out once – once it’s gone, it’s gone. So then there are pressures on corporates’ bottom lines to make DC sweat. The consultants start to think, ‘How can we make more money out of our clients?’”
DC leaves much more power in the hands of members, leaving much less room for investment advisers to add value than in a defined benefit (DB) context, where trustees are able to autonomously select a range of investments using their own judgement. In DC, the big decision is which default fund to pick (or which funds to blend and white-label) and which other funds to offer to members. It has nowhere near the same investment complexity as DB.
As Damian Stancombe, partner and head of workplace health and wealth at consultancy Barnett Waddingham says: “DC is a lot simpler. It’s an inflation-plus solution. You don’t have the illiquid investments that are allowed within DB. That may change and that may give [boutique asset managers] an access point. But at this moment in time? It’s very hard to imagine anyone but the very largest, established asset managers really making process into the UK marketplace.”
The expectation that DC schemes will consolidate over time is further fuelling this trend towards big players wielding the most influence. The advent of mastertrusts and the regulatory drive towards scale have been well-documented. If schemes become fewer and larger, demand for investment consultancy and asset management advice are likely to mirror the changes and become concentrated.
”It’s very hard to imagine anyone but the very largest, established asset managers really making process into the UK marketplace”
Moreover, large schemes may well bring investment management in house, as has happened in the Australian superannuation market and in the UK’s large DB schemes.
“Opportunity around investment consultancy and product provision is going to shrink dramatically,” predicts Stancombe.
In such a competitive and rapidly changing environment, it’s no wonder that consultants, providers and asset managers are diversifying into new areas – and striving to win their clients’ trust. “I think what we’re seeing is a change of providers, of the consultants and the asset managers – an unholy trinity vying for position with the decision-makers,” says Stancombe.
The upshot is that some consultancies are diversifying into designing investment solutions in a bid to retain their traditional share of market and influence. Meanwhile, perhaps disillusioned by this trend or perhaps seeking to conduct a similar landgrab, asset managers are bypassing consultants and reaching out to schemes directly.
Not every consultancy is planning to diversify into product provision. In fact, a gulf is appearing between those who offer services other than advice, and those who remain independent.
Naturally, those who remain independent – such as Barnett Waddingham – are all too keen to shout about it. “We want to be able to stand in front of trustees or corporates and understand their issues and concerns and provide a consultancy to them that they need and will add value. I don’t think that is necessarily true of some of the people we see in this marketplace,” says Stancombe. “They go in there with a product that they are looking to sell – be it a trust, be it their white-labelled investment funds, be it they are doing it for their own gain and not what we should all be in this game to do, which is basically add value and solve problems.”
In defence of consultants
It is very easy to be critical – but ultimately, aren’t consultancies just trying to stay relevant and ultimately, profitable? There shouldn’t be any shame about that; they’re not charities. “It’s reality - everyone tries to make the most out of their clients. Independent trustees do!” says Michael Clark. “We are all of us selling. It’s not a dirty word. What is a dirty concept is selling stuff that’s not actually required or fully understood.”
Ultimately, everyone is conflicted, whether it’s obviously or more subtly: the pensions manager who becomes good friends with their longstanding consultant and hates the thought of looking elsewhere for support, for example.
“Opportunity around investment consultancy and product provision is going to shrink dramatically”
“To be honest, most trustees and advisers have some conflicts and there is always a process of managing those conflicts. I do think the delegated model creates more conflicts that you need to give a lot of thought to,” says Ian Maybury, an independent trustee at advisory firm City Noble.
As long as conflicts are managed appropriately, are they an issue? Steve Budge, a principal in Mercer’s DC and savings team, explains that the company separates its advisory business from the team that runs its mastertrust. If a client wants Mercer to pitch for its mastertrust business, it will be a completely different team to Mercer’s regular consultancy team.
Budge makes the point that actually, DC consultancies offering investment or fiduciary management solutions are putting their money where their mouth is. If a scheme awards a consultancy a fiduciary management mandate, it is surely much easier to measure that fiduciary manager’s success at cold, hard investment management than the efficacy of a traditional consultancy’s advice – and sack the fiduciary manager if they don’t achieve the expected return.
The issues arise when these conflicts aren’t properly managed. One trustee tells the story of asking a consultancy firm to recommend two diversified growth funds. “Without any correspondence, without any conversation, the recommendation came back, six weeks later and it just happened to be their own white-labelled fund.”
The trustee concludes: “Trustee boards need to make it abundantly clear to their consultant that if they recommend their own white-labelled fund, they need to explain why this is stunningly the best option in town. I am concerned about the conflicts of interest which arise out of all of this.”
Ultimately, it’s up to the buyers – the trustees and pensions managers – to sort out the multitude of players vying for their attention. Clark likens the current state of the market to “tectonic plates meeting in the middle. And if you are the poor client being pushed and pulled, you are being squeezed.”
He continues: “It comes down to communication, as all things do. It’s on the trustees then to try to figure out what they want their advisers to do for them. But then sometimes they need help understanding what that is. If they have just one consultant, and they’re not too sure about their investment managers, where do they turn to?”
Worst of all, this may only be the start. Stancombe says: “Opportunity around investment consultancy and product provision is going to shrink dramatically. I think this is the start of turf war, not the end of it and I do fear that the buyer, the corporate or the trustees may become more and more disillusioned.”
Reasons not to be cheerful: Three other reasons why schemes may be lukewarm about their consultants
1. Unprecedented regulatory change causing general stress
“It’s the sheer volume of change”, says Dianne Day, an independent trustee at ITS. Schemes have either already reviewed their investment default or are about to do it – and there are an awful lot of pension schemes which have yet to start the process, she says. “We are kind of mid-change from an industry point of view. If you haven’t done it you’re about to do it.”
This is stretching schemes’ resources to breaking point: “With staffing for DC really operating on a shoestring in many cases – there’s very little scope and tolerance for error. I do think at some level there is an element of not “blame the messenger” but “blame the consultant”, because the consultant is who they are interacting with,” says Marc Haynes, managing director, investment management at Greenwich Associates.
2. Inconsistency in the market
The opportunities are high in the DC market – but so are the stakes. The costs of entry are significant and as competition heats up, some players may decide their strategic focus is better placed elsewhere.
“We’ve seen a couple of reasonably sized EBCs [Employee Benefit Consultancies] pulling out of the market, Barclays being a good example,” says Damian Stancombe. “On a whim, they’re gone and you’re left with several hundred corporates now trying to find a replacement, which would probably annoy me somewhat if I was a corporate that had bought into a long-term relationship.”
3. Changing charging structures
“I think in the past, consultants were seen as these benevolent entities who provided lots of advice and support over the phone and never charged any money for the service,” says Marc Haynes. “Now they are charging money and [schemes] are acutely aware of how business models work and much more attuned to the service quality.”
Why? The government’s increasing focus on value for money has impacted consultants, Haynes argues. “There has been a significant increase in focus on margins both on the part of providers and consultants. The consultants have been purposely moving out of the SME part of the market and leaving that to others. To the extent they have been de-emphasising that, any clients they have in that space are probably feeling they are not getting the best of services.”