As you may be aware, the Financial Conduct Authority (FCA) has referred a review of the supply and acquisition of investment consultant services and fiduciary management services to the Competitive Markets Authority (CMA) for investigation.
The referral was prompted by concerns that the concentration of suppliers in this market might have adverse consequences for the quality and value of advice to pension scheme stakeholders. This concern is brought into sharpest focus in relation to fiduciary management, where consultants both advise on and recommend investment products and solutions that they manage themselves. The question is: “Does this holistic approach promote greater efficiency, or are potential conflicts of interest too much of a barrier?”
Fiduciary management provides an investment governance framework which wraps advice and implementation on both strategic and tactical levels. The concept has gained considerable traction over the last few years with pension scheme decision makers, who struggle to fit the complexities of pension scheme problems and solutions into their own busy schedules.
The number of schemes purchasing fiduciary management services has increased over the last 10 years from 61 in 2007 to 805 in 2017, according to KPMG’s 2017 UK Fiduciary Management Survey. Fiduciary management provides trustees with a nimble decision-making framework and a more stringent governance solution. Historically, such solutions were used by the larger pension schemes with greater governance budgets, however offerings that may appeal to smaller pension schemes have come to the market more recently.
So far, the CMA has concluded that the investment consulting market is reasonably diverse and that concentration is not yet a major issue. However, it sees higher concentration in the fiduciary management market and, whilst this is not yet excessive, it cautions that the barriers to entry and the ambitious plans of the largest providers could become a concern.
Of note is the prevalence of schemes, nearly 75%, that use the same provider for strategic investment advice and implementation. Furthermore, less than 10% of schemes using fiduciary managers have switched providers in the last five years. Together, these statistics suggest that clients are being steered into their current advisers’ solutions and have insufficient experience to test alternatives.
The CMA has released a series of papers highlighting its research to date plus potential remedies and measures; which, in the extreme, could include a legal separation of the two service lines and requirements to re-tender the business after a certain period to encourage investors to assess other providers in the market and actively review the current provider.
The CMA continues to seek evidence and its provisional conclusions will be published in July, with a statutory deadline of March 2019 for its final decisions.
Our own view is that we support the aim of the review and the goal of higher standards, even if this requires further regulation. Of course, one should never throw the baby out with the bathwater and we suspect that measures that encourage independent, third party oversight might be adequate. We also believe that it makes sense for strategic advice and implementation to be provided by independent parties, but that this could be promoted on a comply or explain basis.
Jayna Gandhi, Investment Consultant at Quantum
jayna.gandhi@quantumadvisory.co.uk