Breaking up is hard to do, but trustees should not be afraid of switching fiduciary manager. David Blackman explores how to compare providers.
If breaking up is hard to do, it seems especially so in the case of fiduciary management.
Until last year very few schemes had switched fiduciary managers. Now though, more schemes than ever are reviewing their delegated investment arrangements.
Is the grass greener?
If trustees are fed up with the service they are receiving from their fiduciary manager, how confident can they be that the grass is greener elsewhere?
“Comparing performance is hard,” says John Finch, director at JLT Employee Benefits, arguing that investment strategies have to be tailored to the needs of the individual client, meaning proper comparisons will be tricky until a larger bank of clients with similar characteristics has built up.
The trouble with fiduciary management is that it’s very difficult to evaluate the manager”
He adds that this highly customised nature means it has proved difficult to build league tables of firms offering the service.
Steve Delo, chief executive of independent trustee firm PAN Governance, agrees: “The trouble with fiduciary management is that it’s very difficult to evaluate the manager. Even if you’re happy with outcomes, you don’t know necessarily what’s causing them.”
Adding the extra layer of management means it will take time to unpick to what extent good or poor performance is being driven by the underlying fund managers or the fiduciary provider.
Fiduciary management relationships should be long-term”
Anthony Webb, head of fiduciary management advisory at KPMG, says: “Fiduciary management relationships should be long-term because a fund manager is managing your underlying relationships. It takes a while for your fiduciary manager’s performance to filter through, so it will take a little bit longer to determine whether they are adding value.”
But he believes that the components of an investment portfolio, such as the return-seeking assets, can be benchmarked.
“You can compare your individual performance to similar mandates,” he says. “If you get in a taxi and your driver gets stuck in traffic, it’s not his fault, but if he runs into the back of a bus it probably is.”
Cost is a relatively easy way of benchmarking different providers
Cost, of course, is a relatively easy way of benchmarking different providers, particularly now that the market is more competitive. Will Parry, investment consultant at Xerox-owned Buck Consultants, says that when conducting reviews of delegated investment relationships, he has been able to cut up to 10 basis points on fees ‘“without too much trouble”.
The problem with switching
However, the sheer difficulty of switching providers should not be underestimated, warns Parry. “It’s a pretty big step to take,” he says. And it will be particularly tough where investment management has been fully delegated.
Even when switching investment consulting, it is rare for the entire assets under management to be transferred.
It’s a pretty big step to take”
Delo says it is important for trustees to judge their fiduciary managers against the goals they were initially hired to deliver.
“You should be appointing a fiduciary manager because you have a particular objective in mind, so make sure that you are monitoring them against the criteria that you used to select them in the first place and where the risks are.”
But if the scheme needs change, it may require a slightly different type of provider, such as an asset manager, rather than an investment consultant or vice-versa.
In the end trustees have to be able to pay their benefits”
What is important is to regularly review arrangements so that trustees can make sure they are getting the service they signed up for. Parry stresses: “There are instances where trustees see they are in a different relationship to the one they thought they were in.”
Pointing to the continuing poor funding position many defined benefit schemes still find themselves in, Andy Tunningley, head of UK strategic clients at BlackRock, says: “You can’t see the status quo being maintained if the pension funding world keeps getting worse, if that is the traditional consultant fiduciary (management) model.
If you don’t feel you have that power, you will become a captive client”
“In the end trustees have to be able to pay their benefits and if they are not going to the right providers to help them, they need to change their providers: this is an investment problem above all else.”
And Webb says trustees should never feel that they are trapped into working with the same provider.
“Every fiduciary management client should understand that they have the ultimate power to switch provider. If you don’t feel you have that power, you will become a captive client.”