Solving consultancy's transparency problem

Spurred on by the Financial Conduct Authority’s investigation of asset managers, there is growing acceptance in the pensions industry that the advisory sector needs to better communicate the value and cost of its services.

Unfortunately for the industry, the CMA’s findings show that that pressure has not yet translated into transparent practices in either service.

In a report published last week, the markets watchdog found that unlike traditional investment consultants, some fiduciary managers are failing to issue clients with regular invoices, and that a lack of cost breakdown makes it unclear what fees were going towards or why they change.

Where the CMA report has been refreshing is that it has acknowledged that the buy side needs to up its game as well

Alan Pickering, Bestrustees

Meanwhile, the consultants lag behind their fiduciary cousins on disclosures of performance metrics to ongoing clients, a key component in assessments of value for money.

In tendering processes, the CMA says fiduciary managers were generally better at showing their track record than advisers, who also confused schemes with fee structures that frustrate comparison of products.

All in all, the picture painted is of an industry “not providing customers with the necessary information to judge the value for money of investment consultants and fiduciary managers,” the report concludes.

“The potential competition concern with this is that customers are not well equipped to choose, and subsequently monitor the performance of, their provider and in turn to drive competition between investment consultants and between fiduciary managers,” it continues.

Can you measure advice?

One potential remedy the CMA has highlighted is requiring traditional investment consultancies to disclose standardised performance metrics.

However, during the CMA’s evidence gathering leading up to the report, consultancies including Mercer, Hymans Robertson, JLT Employee Benefits and Punter Southall had argued in submissions that it is tricky to assess the performance of advice given.

This is primarily because, unlike in a fiduciary manager mandate, trustees are not obliged to take the advice they are given.

Some take a dim view of this argument. “For both advisers and fiduciaries it’s about having a very clear objective measure,” said Richard Dowell, head of clients at Cardano, which offers both consultancy and fiduciary management. “Our job is to help the trustees improve their funding ratio.”

“A large part [of advice] is taken, and if it isn’t taken then I think it’s important that the adviser and the trustees work together to understand why,” he added.

Andy Agathangelou, founding chair of the Transparency Task Force, agreed. “It is difficult to do that; however, we need to accept the difficulty and then find a way to... objectively apply metrics that enable decision-makers to readily judge the value of the advice that’s being given.”

Trustees cannot escape responsibility

It is possible that increasing regulatory requirements on service providers is only masking a deeper problem with the buy side of trust-based pensions. The CMA is also floating the introduction of trustee guidance for value for money assessments.

“Where the CMA report has been refreshing is that it has acknowledged that the buy side needs to up its game as well,” said Alan Pickering, chairman of Bestrustees, who agreed that advice is difficult to measure.

What is crucial is that a trustee board has robust processes for challenging and evaluating advice, and chooses a consultant with whom they can develop a personal relationship, according to Pickering.

“I’m much more interested in how the consultant can interact with a particular group of trustees rather than focusing on which house they come from,” he added. “All of the credible players in a the UK market have good people, but not all of them are good people.”

Fiduciary fees need careful scrutiny

The same emphasis on trustee governance could well improve transparency in the fiduciary management business, where the CMA said cost opacity was the most prevalent problem.

“If the trustee board has its wits about it, it should be making sure that it fully gets to grips with the charges,” said Roger Mattingly, managing director of Pan Trustees.

He said a robust selection process should demand all documentation, such as fund management agreements, ahead of any decision, and should see trustees prepared to challenge anything that is not a legal requirement. However, a third-party evaluation service provides an essential aid during tendering and monitoring exercises.

Evidently, not all trustee boards live up to this standard of governance. Sixteen per cent of respondents to a CMA survey said they found it “not very easy” or worse to monitor fiduciary management fees.

“Is there a need to enforce mandatory behaviours? ...It sounds as though there may well be,” said Mattingly.