News & Views

The world of manager selection advice with no research

How would trustees react if their investment consultant suggested that they invest all their assets with a single fund manager so there was no diversification benefit in the decision?  Furthermore, the investment consultant stated that they had carried out no research on the manager or sector, had no idea whether the manager was ‘best in class’, that they had not completed any due diligence on the operational capability of the firm and had no idea whether the fees being proposed represented good value or not.  However, the trustees need not be concerned at their lack of research as all the fees from this asset management contract would be paid to the investment consulting firm and, quite possibly, the consultant would be directly rewarded in their bonus for facilitating the change.  It sounds absurd, but this is exactly what many investment consultancy firms are effectively saying when they recommend their in-house fiduciary management services.

No doubt, many of the investment consultancy firms, would counter with the argument that they are not really acting as an investment manager, but that fiduciary management is simply a more efficient way of them implementing their best ideas.  Whether this is justifiable or not, trustees should be aware that if they appoint a firm as a fiduciary manager they will end up with an investment management agreement with that firm and a significant change in the governance arrangements of their scheme. 

Clearly, any such change should have prompted the investment consultant to recommend that a similar process be followed in selecting a fiduciary manager as when selecting any other fund manager.  A failure to do so clearly undermines the independence of the investment consultant’s advice.

Since the announcement last week that the Financial Conduct Authority would examine potential conflicts of interest in the investment consulting sector there has been significant comment about investment consultants promoting their own fiduciary management services.  It is right that there has been.

Investment consultants are appointed by trustee boards to provide them with independent advice in the areas of strategic investment, asset allocation and manager selection.  When it comes to manager selection trustees expect that the investment consultant will have carried out detailed research on the manager and a full review of managers in the sector before either recommending a manager or providing a short list of ‘best in class’ managers.  Trustees are protected from any failure in the process, as manager selection decisions will be diversified across a number of different asset managers.  The approach, although it does have some flaws, has worked effectively for pension funds for many years.

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24th November 2015