Poor execution – a pigsty – not a playpen

PigA researcher I was speaking to yesterday asked whether I considered the bad practices associated with the poor execution of trades by fund managers as criminal fraud. His argument was that indirect benefits such as the receiving of rugby tickets from your dealer went beyond “a conflict of interest” and represented “white collar theft”.

Thinking about it, I can’t call this theft, nor the activity criminal, but it is morally atrocious as those who manage funds have a fiduciary obligation to “treat  customers fairly” and a legal obligation to apply best execution to their trading. The FSA’s paper on conflicts of interests should make the ranks of managers and consultants at the Home Internationals, keep their heads low as the cameras pan across them.

But we need to go beyond the banner headlines and investigate exactly what goes on when a large fund makes a trade. Where is the leakage and how can the plumbing be improved. If we know the questions to ask and understand the difference between good and bad, we can apply governance. If we don’t bother with the detail, we won’t stop the drip drip that compounds into the 40% loss of income in retirement that charges can create ;- the power of compound drippage eh!

Here are seven things that we should be looking to change to improve things

  1. We need to improve the information flow; share and unit holders in funds get shortened reports that provide inadequate information to fully understand what is going on. The argument is that the long forms are too unwieldy and too expensive to send out by post. Get real, post is not the way to deliver this information. The default delivery option must be e-mail, the document(s) should be sent as PDFs and everyone should have both the short and long forms.
  2. The spectacular own goal of taking Portfolio Turnover Percentages out of compulsory fund reporting needs to be reversed. The churn rate of the portfolio is a key indicator of conviction (low churn, high conviction); as importantly , it is an indicator of the costs being incurred by the fund, the more churning, the higher the costs.
  3. We must rationalise the supply chain of information. Fund managers give instructions to dealers who place orders in the market, the costs are reported by the manager and then lost by the insurer wrapping the fund. By the time the member of a DC fund tries to access information via the platform they use, the source of the information is so distant that even experts don’t know where to go. The way to go on this, is the way the ABI have promised to go. ABI, I continue to watch for signs of progress and will admit no recidivism! We need the insurers to get the information from the IMA (it is published deep in the fund accounts). If the structures of the insured funds are too complex to report on, those structures need to be rationalised
  4. We need to understand the market into which traders place orders. My understanding is that their are primary markets (the recognised exchanges) intermediate markets and what are referred to as “dark pools”. BEST EXECUTION involves the skilful trading across all markets , to ensure best dealing prices, lowest spreads and to minimised the pricing impact of a trade. Pricing impact is particularly important, skilful execution ensures that market makers do not see your money coming, If a market maker gets a whiff that there is a trade on the way, he has the opportunity to reprice the asset on sale to creat value for himself and take value from the fund.
  5. Stock lending is similarly murky. The recent law-suit against Black Rock in the States revolves around that manager retaining 40% of the profits in the States and 60% of the profits from lending on “overseas” equities. The charge is profiteering at the expense of fundholders. We  don’t know enough about how  managers offering funds in the UK use stock lending and share the revenues (and we should).
  6. We have to have targets for best execution, sure these will vary according to size of fund and the fund’s investment principles. The difference between “good” and “bad” on commissions is huge 3.5bps v 25bps (according to my man on the inside). Spreads are similarly elastic and while we cannot do much about the rate of stamp duty , we can minimise its impact by minimising trading. We need to know who is benefiting from stock lending and by how much.
  7. Last but not least, we need to encourage fund managers to own the performance of their funds. There are two many jobbing managers who flit from fund to fund. The best way to reward fund managers is to get them to focus on long-term investment and this means incentivising them to think long-term. It’s good to see that Lord Turner’s parting shot as he leaves the FSA is to call for managers to be rewarded on their comittment to long-term investment.

There is no excuse for poor execution. Managers who execute well should get the money and those who don’t should be starved of funds, that’s how a good market operates. But without perfect information we will have an imperfect market.

It is up to consultants to fight this fight – there are some good consultants doing this in the UK , but not many – we need better awareness among the experts, we need consultants to be unconflicted (hats off to Towers Watson who are now not taking any incentives – even when under £10), we need consultants who are going to be tough on this.

We need trustees who are going to learn from consultants and make independent researches. On this subject , they should spend time exploring Alan and Gina Miller’s excellent website http://www.trueandfaircampaign.com/.

We need journalists , commentators and bloggers to keep up the pressure.

Finally we need regulators to continue to apply pressure on the ABI and more particularly on the IMA. These trade associations rightly act for their members and not the consumer. But when it is recognised that the interests of manager and consumer can be, should be and will be aligned -WE WILL GET CHANGE.

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
This entry was posted in David Pitt-Watson, dc pensions, First Actuarial, governance, pensions, Retirement and tagged , , , , , , , . Bookmark the permalink.

8 Responses to Poor execution – a pigsty – not a playpen

  1. ginanmiller says:

    Hi Henry
    Thank you for mentioning our True and Fair Campaign. There is still much to be achieved but at least the new head of the IMA, Daniel Godfrey, accepts the level of hidden charges and fees unlike his predecessor. But to ensure his words are not a thin veil of rhetoric, we all need to keep the pressure up.

    Interestingly last december I presented Mr Wheatley with a True and Fair Campaign’s Six Point Plan:
    1. FCA should demonstrate it is not a prisoner of the industry – stop delegating key powers to the investment trade bodies; strong regulation and statutory rules are critical
    2. 100% transparency on charges and investments, policed by the FCA, with legal force. Voluntary codes do not work
    3. A Code of Ethics – with those who act against consumer interests: named, shamed and prosecuted (if needed)
    4. Regulation focused on reducing conflicts of interest, increasing competition, transparency and therefore overall trust
    5. FCA to enact wide-spread communication with industry prior to regulation to ensure it is clear, logical and effective
    6. Every key FCA decision judged not in isolation but in overall context to ensure consumer is better off.

    Like so many others, we believe there are a number of issues that need urgent examination or serious trust deficit plaguing our savings and pensions industry will continue. The industry must stop burying their heads in the sand or their demise will be no-one else’s fault but their own. rhetoric. Together our 12 points should get the race for change off to a flying start.


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  3. Steve Barker says:


    As usual, another entertaining and thought provoking piece. The arguments seem compelling, but in this case, I believe they are misguided. I wonder if you are “playing to the gallery” to an extent? I need to declare at the outset that I am not unbiased in this; I have had my snout in two corporate hospitality troughs, first as a fund manager and now as an investment consultant. But on balance, I think that corporate entertaining does more good than harm to clients.

    The obvious potential problem is the conflict of interest. Does the recipient favour the provider of the hospitality to the detriment of the clients?

    But conflicts of interest are prevalent anyway. From trustees that are also employees of the sponsor, to consultants and actuaries that might be tempted to sell additional work of questionable value to their clients; to fund managers lobbying for a change in regulation that suits their own charging structure (you have to admire their chutzpah!).

    I might be naïve, but I believe that most people working in the financial sector are honest and can cope with these conflicts. There are some notable and high profile exceptions, but this is true of all professions and industries. It is easy to think of examples of corrupt teachers, journalists, nurses, lawyers, politicians, clergy…

    Fund managers tend to be too competitive and too proud to let a rugby ticket endanger their performance figures. In this respect, their interests are very well aligned with their clients. As a consultant, I would not let such trivial matters endanger my relationships with clients either.

    Lunches, drinks, and corporate hospitality events are helpful in building relationships between either fund managers and investment bankers; or consultants and fund managers. Rather than being sinister I think these relationships can help the ultimate clients.

    As a bond manager, for standard sized trades I normally asked 3 managers for two-way prices and dealt with the cheapest. However, for very large transactions this approach would have probably moved the market against me. Market impact is a hidden cost that can be larger than the bid/offer spreads and commissions that you are concerned about. Instead, I would “open up” to a broker. Trust was required on both sides. They could preload their books and move the market against me, but I could have also hurt them by doing a similar trade with one of their competitors at the same time. Knowing the individual in a social context (and them knowing me) made it easier to build that trust.

    As a consultant dealing with smaller schemes, there have been many times that I have had to ask for favours from fund managers: to waive minimum investment sizes or minimum fees; to allow investment into “soft closed” funds; or to find investors moving in the opposite direction so we could avoid transaction costs. In some instances I have been warned off certain funds by their own consultant relationship manager. In vino veritas est. All of these favours have helped my clients. My clients are too small to warrant “special” treatment, so I have to rely on my relationships. Informal channels tend to be far more effective. Conversely, many fund managers approach me informally for feedback about their products. I’m happy to help as this can only benefit our mutual clients.

    Rant over. I have a couple of other observations.

    Although fund managers ought to minimise transaction costs, this is only one factor to consider when selecting managers. It would not make my top ten of issues to consider. A poor trade will be expensive for a client even if the transaction cost is zero. Conversely I’d be happy to pay a high transaction cost if the net effect was a profit for the fund. Part of a fund manager’s skill is in assessing whether a trade is worthwhile taking into account both the risk and the likely transaction costs. They are in a better position to make the judgement call for each trade than an investment consultant or regulator. I would not want to unnecessarily constrain their turnover. Besides this, transaction costs will not include the effect of market impact. I’d prefer to pay a higher commission but get a better net price, than save on commission and pay more for a clumsily-executed trade.

    I find it ironic for a (ex-) regulator to complain about short-termism. Although defined benefit schemes have long term liabilities, their investment horizon tends to be quite short. The main reason for this is the insistence on mark-to-market valuations introduced by regulators. Maybe regulators do have a sense of humour after all?

    I am going to Twickenham on March 10th to watch England take on the much-improved Azzurri. I will be a guest of Lazard Asset Management. If the camera pans towards me, I will smile and wave rather than hide my head. If I felt I had to hide I would not be there. I intend to enjoy myself (win, lose or draw) and get to know my host and fellow guests better. I will be happy to put forward Lazard funds if they are the best fit for my clients. I will also feel comfortable to not put them forward if there are more suitable alternatives.


    • henry tapper says:


      Your candour is great and you are articulating a position that is thought through.

      But surely, just because conflicts are everywhere, we shouldn’t court them by accepting hsopitality?

      The FSA;s paper on conflicts is absolutely explicit on the damage that can be done. We are rewarded handsomely for our efforts. We have ways (the pension play pen) to organise to go out together and pay for us!

      As regards the negative impact of mark to market accounting, I couldn’t agree more. Speak with Terry Smith about how he got round the problem with the Tullet Prebon Scheme.

      I don’t suppose many sponsors could support their pension to allow long-term investment , which makes it all the more important we adopt a better means to value pension liabilities!

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