The investment consulting market is more competitive and diverse than the FCA suggests in its Asset Management Market Interim Study, the ‘regime’ for strategy advice needs to be appropriate, and determining what that is, is not a market competition issue. 

Hymans Robertson challenged some of the views set out by the FCA in response to its Asset Management Market Study consultation. In particular it emphasised there is more competition in the investment consulting market than the FCA study suggests. It also raised concerns about strategy advice coming into the regulatory regime for fund managers when the high professional standards of scheme actuaries, which most players in the investment consultancy industry abide by, is more appropriate. 

Commenting on an increasingly competitive landscape for investment consulting, John Walbaum, Head of Investment Consulting said:

“There are more firms involved in the investment consulting market than ever before. Added to that trustees have more choice of implementation methods than ever before. This increase in market participation, along with diversification of approaches, has given a welcome boost to competition. In that context, referring the activities of the investment consulting market in aggregate to the CMA is not an appropriate course of action.

“The FCA study itself refers to the latest figures for advisory revenues of the three largest firms as representing upper bound estimates, with the true level of concentration potentially much lower. Medium sized-firms, as well as smaller firms, have been taking market share. We’ve seen a range of new entrants in recent years.

“The subtext to the consultation being extended to look at the activities of investment consultants is that some consultancies offering fiduciary management services are now asset managers as well as advisers. This is where the competition issue lies – not in the wider investment consulting market.

“Fiduciary management can make sense for schemes with lower governance budgets. While disclosure of potential conflicts is widespread and external oversight growing, we do share the FCA’s concerns on conflicts of interest around firms offering independent investment advice whilst also providing the underlying investment product.

“However in dealing with the issue of how to measure and assess the performance of advisers who also offer fund management services, we could end up in a situation where an industry that already adheres to incredibly high professional standards is brought into a different regulatory regime appropriate for fund management. Strategy advice and fund management are different and should assessed and measured differently.”

Explaining why the value of consultants’ advice should be assessed and measured against clients’ specific objectives – not arbitrary benchmarks, he added: 

“The FCA paper looks at bringing the strategy advice offered by investment consultants and employee benefits consultants into the FCA’s regulatory framework to ‘find a better way of monitoring the performance of consultants’.

“Fund manager performance is usually measured against benchmarks and quantitative assessment is straightforward. This is not the case with strategy advice. Most recognise that developing quantitative metrics to measure consultants’ strategy advice in isolation is difficult. Qualitative measures would also be required.

“That’s because each scheme has different investment objectives with a wide range of attitudes, beliefs and appetites for risk as well as different strength of sponsor covenant - and these will also change over time. The provision of advice needs to be measured against longer-term objectives set by a client and should focus on a combination of returns achieved and risks mitigated. Looking only through the lens of absolute returns or short term performance would be wrong.

“The Department for Work and Pensions (DWP’s) Defined Benefit Green Paper issued last week underscores this point, recognising the importance of objective setting in this way for schemes. It’s consulting on whether there could be a role for Government in setting out a range of acceptable objectives such as buy-out, a reduction in balance sheet volatility, or reaching a certain level of funding by a certain time. It’s worth noting that these are all long-term objectives.”

Countering the FCA’s stance that trustees can’t scrutinise the performance of consultants, he added:

“Many trustees of the pension schemes we advise already have formal or informal programmes of regular review of their investment consultants and other advisors in place. Trustee Boards usually comprise business professionals from all walks of life who take their duties, particularly in relation to governance, seriously.

“Added to that most trustee boards now include independent trustees. The significant growth of independent trustees introduces another influence to decision-making and assessing advice. Their oversight of multiple schemes puts them in a unique position of knowledge to compare the quality, effectiveness and ‘value add’ of advice. These professional trustees have grown in number and provide an invaluable service in assessing the value of advice trustee boards receive.

“However, we’re keen to work with the industry to develop a common set of guidelines and best practice to measure the value added by consultants. Professional standards in investment consulting and employee benefits consulting businesses are already extremely high, and more rigorous than in many other professions. The question of how to monitor and measure the quality of strategy and asset allocation advice consultants give is not a market competition issue.”