This year I left my Christmas shopping to the last minute. I would not recommend it. All seemed well on Christmas Day with the usual smiles and joviality. However, on Boxing Day the first hint of problems started to emerge. “Do you really think red suits me” was the opening gambit, followed shortly afterwards by “I am not sure I wanted a sweater anyway.” All was not lost, as armed with the gift receipt, the sweater was soon replaced with a more appropriate item and harmony was restored.
Trustees may not be so lucky. They do not get gift receipts that allow them to correct any problems from an agreement entered into in haste. Nowhere is this truer than in agreeing a fiduciary management contract.
Such agreements may well be the most important agreement for the management of a pension scheme, incorporating, as they do, not only strategic advice, but also the management of all the scheme’s assets. Despite this, perhaps relieved to have got to the end of a difficult and complex fiduciary manager selection process, and anxious to get on with the implementation of the new arrangement, many trustee boards simply forward the chosen fiduciary managers contract to their lawyers with the question ‘is there any reason why we cannot sign this?’
In such circumstances I have some sympathy for the lawyers. This is often the first they have heard about the appointment of a fiduciary manager and they have no idea about the commercial arrangements that may have been agreed. With time pressures from the trustees, lawyers will typically eventually respond with, ‘we see no legal reason why you cannot sign the contract, however, we have not been able to consider whether it fits with the commercials’. This failure to examine the commercials is not trivial and is not something that will have typically been an issue for trustees when entering into an agreement with a fund manager. In fund manager agreements, the investment consultant will ensure that the commercials are correctly represented in the legal agreement. However, with fiduciary management agreements, the investment consultant is often an employee of the firm selected to be the fiduciary manager! Will they really represent the interest of the trustees over their own firm? I doubt it. As a result, contracts are entered into that are often biased in favour of the fiduciary manager.
Examples of this are all too common and typically come to light when a review of the arrangements takes place. The most common issue, is that decisions that trustees had believed had been delegated to the fiduciary manager, and that the fiduciary manager is taking on behalf of the trustees, in fact remain the legal responsibility, according to the agreement, of the trustees. Consequently, if there were any failing on the part of the fiduciary manager, the trustees would have no legal redress, as the agreement clearly left them responsible for all decisions.
These potential problems can be easily avoided by getting the scheme lawyer involved much earlier in the selection process, so that they are able to gain a good understanding of the commercial elements of the arrangement. The eye watering level of lawyers fees may make trustees reluctant to do this. However, this cost will still be small when compared to the total value of a fiduciary management contract, or the potential loss to the scheme if something should go wrong for which the fiduciary manager could not be held accountable.
Furthermore, trustees should not expect an investment consultant, employed by the fiduciary manager’s firm, to robustly represent the trustees’ interests over the consultant’s employers. Even where the trustees have a long and trusted relationship with the consultant, they would be advised to seek some independent advice to ensure the commercial arrangements and fees truly represent the trustees’ interests.
Trustees do not have a ‘gift receipt’ to give them a second chance if something should go wrong. They would therefore be advised to take their time establishing the relationship with a fiduciary manager and not to enter a legal agreement in haste!