Interest in fiduciary management is growing fast. At least according to surveys indicating the market has grown by 40% since 2011 and with £23bn in assets under full fiduciary management and another £30bn managed on a partial basis, it sounds like it is taking the world by storm.
This of course is a drop in the ocean – less than 5% of all the investable assets at pension funds’ disposal. That said, there is a buzz about what fiduciary management can offer schemes and of all shapes and sizes. “The market is changing as we speak,” says Marcello Dellavedova, business development director at MN Services. “The conversation is different as well. It used to be about what fiduciary management is, but now it is more about where the client can see value added. It’s much more specific about how the proposition relates to their scheme.” Dellavedova says though fiduciary has been associated with smaller schemes, increasingly larger plans are tendering for fiduciary appointments. But there is debate as to what constitutes fiduciary management, according to Sion Cole, head of client solutions at Aon Hewitt with confusion surrounding the various terms used in this field, which include delegated consulting, implemented consulting, consultancy management, fiduciary management and solvency management. But in essence it is about someone taking decisions in view of funding. “There is confusion around the terminology, but if trustees engage with the fiduciary providers, they will decide what the differences are.” For Cole’s money, the fiduciary contract must encompass the whole of the assets relative to the whole of the liability and responsibility for making decisions. “A fiduciary manager should not be going back to trustees for them to agree to decisions or sign papers. That might be directed or even focussed by the trustees, but it’s not dishing management.” For Mark Davies, head of business strategy for delegated investment service business, Towers Watson, the distinction is simple: “We see fiduciary management as a governance solution and it sits alongside advising clients about alternatives.” This covers offering advice to trustees so they need to make fewer decisions, to make use of outside expertise to hold someone to account for making those decisions. “It works well for some and not for others,” claims Davies, but it is important trustees realise while fiduciary is a delegation of responsibility, it cannot be an abdication of duty. “It’s a partnership between us and the client and the key strategy decisions that need to be made. The trustees or investment committee still make the decisions on these ‘big picture’ issues and we advise them.” Diligence due Some of the fuss about fiduciary offerings concerns not just the model offered, but the type of firm offering it. Most growth has been seen among consultants, and it is broadly accepted this is because they had trusted adviser status. Charlotte Hickey-Brown, a consultant adviser in the UK institutional team at JP Morgan differentiates between providers in the market by placing all consultants within the implemented consulting model, and those with additional management in the specialist model. “They have created a separate business to offer that service and a specialist requires a lot of infrastructure to be in place, which can take years to build up.” As a result, nobody is going to be in this market and just winging it, she says: “You don’t just fall into it because it could ruin your whole reputation.” Though the proliferation of terminology does not help trustees navigate the market, it is to some extent unavoidable, says Ian Love, head of business development, SEI. However, trustees need to be sure any service will address their core needs. “Fiduciary management is not the products, but building a bespoke service for a client and there are no two alike. It’s all about developing a way of working that suits that particular client. You do not outsource responsibility, only capability,” says Love. High level of tendering The outsourcing process has also drawn flak with detractors claiming schemes were simply appointing their existing investment consultant as a fiduciary manager. Though this view was reinforced by market research, most providers insist this is changing. Even those who developed fiduciary from traditional consulting will point to the proportion of their client base that has been competed for or even searches they have not been included in as evidence of a high level of tendering. In fact, even considering a tender process without an expert riding shotgun could prove to be a dangerous decision and “completely inappropriate” for smaller schemes, says Steve White, managing director, Buck Global Investment Advisors. “That works well in corporate environments where the people who buy services are as well-informed as the sellers,” explains White, “but small schemes with no or few experts who are buying from well-resourced investment firms need an intermediary to be there.” Do the right thing Though it is always important in the pension scheme world that due diligence is not only done, but seen to be done, that does not mean trustee boards cannot do a lot of this work themselves. “Trustee boards are pretty good at asking the right questions and can run processes themselves,” says Love. If they seek help, they should be careful who they use, he says: “There’s been a lot of growth in companies offering their services with many of them coming from a traditional investment consulting background and they may find they recommend traditional consulting.”
“A fiduciary manager should not be going back to trustees for them to agree to decisions or sign papers. That might be directed or even focussed by the trustees, but it’s not dishing management.”Sion Cole