Insight

Implemented consulting – is the fox guarding the hen house?

Kevin Gundle | Chief Executive Officer
28/07/2015
3 min read
Download Article

To paraphrase the management guru Peter Drucker – don’t try to forecast the future, but try instead to identify the important trends that are already happening today.

Take fiduciary management as an example. We hear a lot about this new trend and it may yet establish itself as the norm. Many of the global consultants have embraced this new business model and are keen to see fiduciary management become mainstream.

The uptake of fiduciary management services has some way to go. According to KPMG’s UK Fiduciary Management Market Survey – of all the UK defined benefit schemes, only 5 per cent use full fiduciary management services. Consultants espouse the benefits of fiduciary management as being more efficient for their clients, but fiduciary management is also designed to be a lot more profitable for the consultants compared to the traditional fee-based consulting model.

Neatly dovetailed with fiduciary management is implemented consulting – another trend that has seen consultants recalibrate their business models to improve their profitability. Consultants have become asset managers. But will this development produce better long-term outcomes for members? The jury is out.

Open architecture, a concept that once started as a trend, has become standard practice. Open architecture is a given when financial advisers discuss investment options with their private clients. Fundamental to what open architecture is based on, in my assessment, is what I refer to as the Three Pillars, namely: access to best of breed; competitiveness; and the lack of conflict of interest. Aspects of the Three Pillars formed the basis of the Retail Distribution Review (RDR) and so important was the elimination of conflicts of interest that RDR has been enshrined in law.

Are members of a pension scheme any different to private investors? Arguably, the safety and stability of an individual’s pension is more important than the investment choices in an Isa. So why is it that the same degree of scrutiny and oversight is not being applied to pension schemes? Of all the commentary surrounding fiduciary management and implemented consulting – conflicts of interest, disclosed or otherwise, remain one of the biggest concerns being voiced by pension scheme executives and trustees. Understandably so – the inconsistency in the way the Three Pillars have been applied to investment advice is quite startling.

Another striking revelation in KPMG’s survey was that the vast majority of fiduciary mandates were awarded to their consultants without even going to tender. The mandates were won on an uncontested basis without a fee quote from an alternative provider. Did you also just hear a couple of pillars come crashing down?

My firm, Aurum, manages hedge fund portfolios for pension funds. For some time now, my firm has not been invited to pitch for new hedge fund mandates where a scheme’s consultant offers fiduciary management and/or implemented consulting, as these mandates seldom go to tender.

The implemented consultant’s business model is designed to exclude competitors from bidding against the consultant – after all, why would a consultant invite a competitor to pitch against them? And, on second thoughts, why would external providers feel comfortable equipping the consultant with all the data that they need to gain an upper hand? All this gets a bit messy.

Are we observing two new trends – the end of the beauty parade and the end of competitive tenders? If so, this is really bad news for members. Implemented consulting is anti-open architecture because many, if not all, aspects of the implementation will be managed by the consultant’s own in-house team.

The fox is guarding the hen house. These modern day gatekeepers care less about choosing who to let in, but rather keeping everybody else out; and worryingly – keeping their pension clients locked in too.

Fiduciary management is a new phenomenon for UK schemes and implemented consulting can be accused of being ‘closed architecture’. But the light at the end of the tunnel need not be a train. A handful of established UK consultants have deliberately not gone down the fiduciary management route in order to avoid conflicts. Ultimately it is up to the trustees to ensure that the arrangements that are being put into place are designed to maximise outcomes for members. And when it comes to fiduciary management and implemented consulting, a lot more questions should be asked about conflicts and open architecture – because this will provide greater choice, encourage competition and may well produce better results.

A version of this piece originally appeared on Corporate Adviser’s website in the Pensions Opinion section on 28th July 2015.Corporate Adviser is a monthly publication targeted at a wide range of financial intermediaries and financial service professionals.

The publication, together with its sister publication Money Marketing, hosts a range of forums, conferences, summits and awards throughout the year.

Website: www.corporate-adviser.com/

You may also like

Monthly hedge fund performance review – May 2022

20/06/2022

Hedge fund performance was generally negative in May, with wider dispersion than in April. Macro was the only master strategy with positive returns. Strategies…

Multi-strategy deep dive – Apr 22

31/05/2022

Multi-strategy funds posted 12 consecutive months of positive returns during a period that provided a number of significant challenges across the hedge…

Is performance or asset gathering driving growth in hedge fund industry assets?

23/05/2022

In the wake of recent market volatility, even more investors are seeking downside protection from hedge funds, resulting in large inflows into the hedge…

Monthly hedge fund performance review – April 2022

19/05/2022

Hedge fund performance was mixed in April with slightly wider dispersion than in March. Strategies with a higher beta to equities remained weaker than…

Aurum’s quarterly review – Q1 2022

26/04/2022

All of Aurum’s managed funds and bespoke accounts delivered positive returns in the first quarter of 2022. Performance for Aurum’s commingled fund…

Monthly hedge fund performance review – March 2022

20/04/2022

Hedge fund performance was generally positive in March; dispersion was slightly wider than in February. Strategies with a higher beta to equities remained…

Three top tips for designing an employee volunteering programme

08/04/2022

Emily Forsyth-Davies, Head of ESG, Aurum Research Limited, has recently revamped the Aurum Group’s UK employee volunteering offering. These are her three…

Monthly hedge fund performance review – February 2022

22/03/2022

Hedge fund performance was mixed in February; dispersion was tighter and losses were less severe than in January. Strategies with a higher beta to equities…

Event deep dive – Jan 22

07/03/2022

Event driven funds generated an average return of +9.1% in the 12 months to January 2022. AUM has grown by $28.5bn, 76% of this growth was driven by performance….

Monthly hedge fund performance review – January 2022

21/02/2022

Most hedge fund strategies finished 2021 with positive performance in December, with slightly tighter dispersion than was observed in November. Strategies…

Does structure matter? Hedge funds v Alternative UCITS

15/02/2022

Since their inception in 2007, alternative UCITS, a.k.a. alt UCITS, liquid alternatives, or UCITS hedge funds have been popular with investors. Over the…

Aurum’s quarterly review – Q4 2021

27/01/2022

All of Aurum’s managed funds and bespoke accounts delivered positive returns in the fourth quarter of 2021. Performance for Aurum’s commingled funds…