Investment consultants under review


25 Feb 2016

The FCA’s review of the asset management industry will include a look at the role of investment consultants. Pádraig Floyd considers what it might find.


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The FCA’s review of the asset management industry will include a look at the role of investment consultants. Pádraig Floyd considers what it might find.

The FCA’s review of the asset management industry will include a look at the role of investment consultants. Pádraig Floyd considers what it might find.

“The problem is we are selling uncertainty. By definition, if you take risk you cannot know the outcome and so it is difficult to know the value of the offering.”

Nicola Ralston

The role of investment consultant has been transformed over the past decade.

The Myners Report encouraged schemes to move away from the old equity/bond balanced approach with a heavy domestic weighting to a more diversified view of the investment world.

Market volatility has pushed many schemes – especially the more mature defined benefit (DB) schemes – to seek innovative strategies that better manage assets against their liabilities.

While the financial crisis reminded everyone about the importance of liquidity, it showed that just because someone claimed risks were uncorrelated, it didn’t necessarily mean that they were.

In this time, consultants have continued to offer advice but have also begun to cross over the road into asset management and the fiduciary management sector now accounts for more than £100bn of UK pension fund assets.

This has drawn detractors – it goes with the territory if you eat someone else’s lunch – but it is also true that new conflicts will arise and must be managed. How do consultants remain effective gatekeepers if they are placing their own asset management services on the table and how do they demonstrate they can add value?

Until now, this has been an internal debate, but as part of its review of the asset management industry, the Financial Conduct Authority (FCA) is also looking at the role investment consultants play in the market.


While much of the focus is on how asset managers compete to deliver value and control costs, the research will investigate how investment consultants affect competition for institutional asset management.

Pete Smith, an associate at Barnett Waddingham, believes consultants remain effective gatekeepers for their pension fund clients as they can offer an independent view on selecting from the universe of varied skills.

“However,” he says, “it is important to remember there is more than one type of investment consultant,” raising the issue of fiduciary management.

Smith’s firm has made it very clear that it will not offer fiduciary management because it believes the conflicts are too difficult to manage. This is how Smith says independence can be retained.

“I’m aware these companies go to great pains to manage their conflicts, but it does still come down to their business model,” says Smith. “Are they being effective for their clients, or incentivised?”

That said, Smith is convinced fiduciary can deliver value to clients and that it is just what some have been looking for.

“Often fiduciary can be seen as the most effective way of harnessing a firm’s best ideas, particularly in a relationship where best ideas are nearly always adopted,” says Smith. “Where that happens – and it does – what is the difference between it and adopting implementation on a fiduciary management basis?”


Steven Blackie, UK head of investments at Mercer, which does have a fiduciary management arm to its business, says investment consultants do not have any undue influence at all.

“Consultants research managers and we are very open about strategies and the way in which we engage with clients,” says Blackie. “It is quite transparent and I hope we will be able to explain that to the regulator. We help clients by getting asset managers to build funds for them. We don’t pontificate about which fund manager we should allocate to, and trustees after all have the final veto – it is not our decision which the client picks.”

When it comes to fiduciary management, Blackie is unapologetic – clients have been looking for something to improve their governance process, he says. Fiduciary allows Mercer to serve clients more efficiently where governance is not optimal.

“We advise across the whole continuum – from pure advisory through to pure management,” says Blackie, and suggests critics generally come from those who only operate within one section of the market.

“Whether advising in a traditional sense or on a delegated basis makes no difference at all,” says Blackie, “because the client is placed at the centre of everything.”

Fiduciary isn’t simply a “sales mode to boost assets”, he says, arguing that “clients are not stupid – they know what questions to ask”.

And contrary to the received wisdom, a fiduciary contract does not necessarily make a client’s money any “stickier”, he says. Clients know what to expect and if funds should underperform, they will move, he argues.

“It is not true to say that they will stay forever – business is not that sticky,” he says. “Though it’s not as easy as online banking, clients can move if they wish to.”


Of course, everyone talks to their own book and in the investment consulting industry that may mean making claims about independence that say more about those making the claims than those they may be seeking to criticise.

But there is one thing the review must resolve once and for all, says Phil Irvine, a director of PiRho Investment Consulting, and that is the nature of the role of the consultant that plays in both sides of the asset management market.

“Investment consultants are becoming asset managers,” says Irvine. “Whether it’s fiduciary manager, implemented consulting or outsourced CIO is irrelevant.”

Even if the obvious conflicts around oversight and independent review are managed, knowledge is power, says Irvine, and consultants remain in control of presenting that knowledge.

Irvine accepts the fiduciary concept is the logical conclusion of the market’s development. As schemes have become more complex, so the solutions have become more complex. And so the need for understanding of collateral, liquidity, and much more has grown. The previous governance model has shown itself to be sub-optimal because running some six-to-10 weeks out of date makes it difficult to make timely decisions.

Irvine is also critical of the “utter hypocrisy” of moving to an asset management relationship, where consultants have spent years doing searches to find one manager better than another and are now saying they are best placed to manage the money.

Irvine’s co-director, Nicola Ralston, is concerned about what the FCA may choose to focus on during the review.

“It’s very easy to identify all sorts of problems,” says Ralston, “but what isn’t easy for investors to know is if they get value for money, are monitoring the consultant properly and whether there are asset management capacity issues or over costs.”

Finding the answer is far more difficult, and she fears many of these issues won’t be addressed or the solutions will merely be box-ticking rather than getting to the root of the problem.


The reason it is so difficult is, simply, because it is so difficult: “The problem is we are selling uncertainty,” says Ralston. “By definition, if you take risk you cannot know the outcome and so it is difficult to know the value of the offering.

“Past performance is no guide to future performance is the perennial caveat, but it also has to be part of the equation. The essence of this problem – and at the heart of consultants adding value – is how do you assess or value uncertainty?”

Ralston uses the example of buying a car. When you go to market, you can compare different cars – at least before the Volkswagen scandal – without having to be an expert on the subject. That is changing with The Pensions Regulator’s vision of a 21st century trusteeship, which calls for greater professionalism from Europe and independents within UK schemes.

That doesn’t mean the industry can’t make rational decisions, but there is a danger of specific themes dominating the review that resolve none of the issues and perhaps compound a few of the problems.

Ralston fears the focus already placed on costs will be amplified. There is pressure on schemes to place more money into cheap passive funds, which is fine by Ralston when there is a compelling reason not to go active as they will benefit from lower fees.

“But passive is not the whole answer, as not all asset classes are available in a cheap form,” says Ralston. Even when asset classes are accessible as synthetics and derivatives, there are risks and liquidity issues to be considered.

“There is all too often an assumption that passive equals liquid, and that is not necessarily the case,” she adds.


Ralston is by no means a lone voice – others fear the FCA could focus on matters that could be detrimental as a whole.

Mercer’s Blackie fears fees is a theme that carries momentum with it following the imposition of the charge cap on default funds. He is concerned the unintended – or possibly intended – consequence of the review would be to drive fees lower.

“Whether they are fund management or consulting fees, this would be a retrograde move as it would drive innovation out of the markets,” says Blackie. “Already, we are constantly looking to innovate and we cannot do that if the margins are being squeezed out of the business every time. That way, you always deliver the lowest common denominator solution.”

Were that to happen, the FCA would undermine its own review’s objective of “understanding whether there are any barriers to innovation or technological advances which may be preventing new ways of doing business that could benefit investors”.

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