Investment consultants and institutional corruption

TrustUnsolicited, a paper arrives in my inbox from the Harvard University Center for Ethics with the same provocative title as  this blog.

I cannot offer it on this blog as it is in PDF but I can give you the abstract which runs like this

Analyses of the financial crisis of    2007-2009 and the continuing effects of a
difficult investing environment have largely focused on factors such   as the roles of
 failed and complex financial products, inadequate credit rating   agencies, and
 ineffective government regulators.

Nearly unexamined, however, is a    key group of   actors in the financial landscape, investment consultants.  

Investment consultants stand as gatekeepers between large investors, such as private and    public  retirement funds, and those from “Wall Street” who design and sell   financial  products. Investment consultants hired by these asset owners    practically control  many investment decisions. Yet, as a whole the profession failed to  protect asset owners in the recent financial crisis and has yet to engage in serious self-examination.

Much of the reason for the failure can be traced to institutional   corruption, which takes the form of conflicts of interest, dependencies, and pay-to-play activity. In   addition, a claimed ability to accurately predict the financial future, an ambiguous legal landscape, and a   tainted financial environment provide a fertile soil for institutional corruption.

This institutional  corruption erodes the confidence and effectiveness of the retirement and investment systems today.  While not  proposing a comprehensive system of reform, this article illuminates    a way forward for those in the industry who have the desire to address and  implement necessary  corrective activity.

The report is written by Jay Youngdahl, it is available by mailing me on henry.h.tapper@gmail.com

In the next few days, if not this morning in Birmingham, Steve Webb is due to deliver further thoughts on consultancy charging. He may go as far as banning it outright or he may simply trim the wings of the consultants who currently charge for their services from the funds of members of workplace pension schemes.

In my view , the practice of charging for investment services delivered to an occupational scheme or the providers of a contract based scheme such as a GPP is fraught with the conflicts mentioned in the paper.

In the USA as in the UK , the dividing line between asset manager and consultant has never been so blurred. Quite openly, major consultancies are advertising themselves as the manager of funds within a a default both in terms of fund manager selection and in the process known as “asset allocation“.

In doing this they are deeming themselves judge and jury (as consultants) on their efforts as the manager of funds and of asset allocation strategy.

I have no reason to doubt the probability of the consultancies doing this, but I would agree with Jay Youngdahl’s historical analysis  and point out that practices such as the taking of a % fee from the member’s fund to pay for investment advice is fraught with potential conflict and really had better be avoided by the consultant (by not doing it) and by trustee and employer (by not buying it).

 

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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