The CMA's Investment Consultancy review
18 Jul 2018
Anthony Ellis, Partner at Hymans Robertson, commenting on the CMA’s ‘Investment Consultants Market Investigation’ provisional decision report, said:
“There will be a collective sigh of relief that the CMA has not proposed any measures that could inhibit innovation in the investment consultancy market - for example, by imposing higher costs or barriers to entry, a focus on peer grouping, or short-term contracts. Investment consultants have driven innovation in the industry. There are many examples of this, such as the move away from balanced funds, the move away from peer grouping, and numerous instances of consultants driving managers to develop products.
“Today’s report suggests that CMA recognises that there is an appropriate best practice framework in place to ensure that millions of people’s pensions are invested well through the institutional market, but that there is scope to improve competition, particularly in relation to fiduciary managers. Mandatory competitive tendering for schemes considering a move to fiduciary management is a sensible step in the right direction. Ensuring there is independent advice on selection and appointment of a fiduciary would be another.
“The CMA concludes that some trustees don’t have the skills or time to scrutinise their consultants, and that some schemes have low levels of engagement so don’t switch or tender. While it’s crucial that we encourage competition, we need to remember that many do not change advisers because they are happy with the service they receive, the quality of advice and the relationship. Given the availability of independent trustees and expert procurement firms, most schemes do have the resource to assess consultants. And we see many mandates being put out to tender on a regular basis. A third of mandates seem to be retendered every 2-3 years and another third every 4-5 years. Higher turnover consultants is not in itself a meaningful objective. Better outcomes for pension fund members should be the primary objective.
“But we do agree that more transparent material around the value consultants add can help trustees, but that the material and measures must reflect the long-term nature of the decisions and relationship. A focus on short-term measures would lead to an industry focused on short-term advice, which would go against the key principles set out in the Myners Review back in 2001. It’s great that trustees will be required to set their investment consultants strategic objectives and firms must report against these. We already help clients set strategic objectives and are very happy to be measured against them. This should be standard practice for all.”