Looking under the bonnet of fiduciary management
01 Oct 2018 - Estimated reading time: 4 minutes
“I’ll take your keys Sir and we’ll park your car safely for you. Off you go and enjoy your holiday!”…..
I’ve often wondered what actually happens when someone hands over their keys to a smartly- dressed concierge to go off and enjoy their holiday. I have visions of tyres screeching round car parks or boy racers lining up to race the posh cars while their owners don’t know any better. I’m sure that’s not what actually happens in practice – but the point is that I really don’t know!
And it’s the same for many pension scheme trustees who “hand over the keys” of their pension scheme to a fiduciary manager. How do they know that their manager is treating their assets with the respect they deserve? And how can they make sure that they are getting value for money for the fees they are paying and that their prized possessions will be delivered intact when they take them back?
The recent CMA review outlined new guidelines for trustees who already use or who plan to go down the fiduciary management route with their defined benefit schemes. These will require trustees to formally tender the position of fiduciary manager rather than simply, as has happened in nearly half of fiduciary manager appointments to date (source: CMA Survey), handing the fiduciary mandate to their existing consultant. The CMA also suggested that trustees should understand what they are buying with a fiduciary manager and should regularly monitor their performance against clear and meaningful benchmarks. As the lines have blurred between consultancy and asset management over the past ten years, there is a relatively small universe of truly independent firms who can help trustees with these important roles.
Our first appointment for fiduciary oversight came in 2012 when were asked to work with MNOPF who had employed a fiduciary manager for the first time. As we’ve worked with more trustees over recent years in this role, we’ve increasingly seen them recognise the need to look under the bonnet of their fiduciary manager, as well as at the headline results. This requires an understanding of their manager's investment philosophy, approach to controlling risk and how they deal with potential conflicts as well as the way they attribute performance and are held accountable for the different elements of a scheme’s return. Trustees are also seeking more clarity on fees, particularly where performance fees are in place and want to ensure that they are getting value for money from their fiduciary manager, both at the outset and on an ongoing basis.
Fiduciary management may be the best solution for some schemes or it may be best as part of the solution, but not the whole. But it’s not right for all or for all time. And this is particularly the case for schemes close to the end of their “journey plan”. There comes a point when trustees need something other than delegated asset management. Trustees require help in recognising when that point arrives as well as understanding what their exit strategy might be when they reach it.
To be fair, I’m sure that most valet parked cars are delivered back to their owners in tip top condition when they come back from their holidays. But wouldn’t you like, just once, to see what really happens when the owners are not there? I know I would!.