Value for money from investment consultants

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In this article I’m proposing that investment consultants are subject to the same degree of scrutiny as the other service suppliers to trustees. Investment consultants should be subject to a Value for Money assessment).

This morning I will be hearing about the latest thinking on value for money for the consumer. The PPI have been commissioned by Standard Life to help take forward the thinking on how IGCs should consider VFM from the providers they govern.

I’m a big fan of the PPI and would be very happy to work with them towards a solution to this thorny problem. The consumer has neither the information or the toolkit to make sense of the information; which is what the IGCs are there for.

That the IGCs don’t have the data is more worrying, that they are still worrying about what data they need, is shocking. Hopefully things will move forward this morning (though you won’t know much more as Chatham House covers most of what will be said!)

It seems strange that, at a time when Transparency is the watchword, we are still under “non-disclosure” restrictions in a public meeting!

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I spent a little time on this yesterday, especially when put under pressure by Andy Agethangelou for questions to put to the FCA at a forthcoming meeting of the Transparency Task Force.

What would I want to see coming out of the FCAs thematic review into (inter alia) investment consultants?

Well I’m not putting myself under a non-disclosure agreement! I would like to see investment consultants subject to the same degree of scrutiny as any other service supplier to a trust board (or indeed an IGC!).

Investment Consultants should be subject to a value for money assessment , carried out at least every three years (and preferably every year) by the trustees of the occupational pension schemes they advise.

The assessment should be conducted by the trustees who appointed them and the results of the assessment should be simply printed in the Chairman’s report with a green, amber or red sticker attaching.

Green would imply a clean bill of health – nothing need be done by either side but BAU

Amber would imply deficiencies in the service supplied – a clear list of these deficiencies should be delivered to the consultants with an action plan for remedy

Red would imply an unsatisfactory performance from the investment consultants and an immediate market review to establish if the trustees could do better.

The assessment would be carried out by the trustees (or a sub-group) and would be assisted by a template of probing questions the trustees should ask themselves. On no account should the investment consultants be invited to complete this questionnaire though the trustees might consider asking the consultants the questions to their faces.

That this be a mandatory part of the trustee’s duties , should come as no surprise to many trustee boards who do this anyway. Though perhaps not in a formal way.

Investment consultants should have no objection, they are proposing exactly this kind of thing on other service providers (particularly the fund managers).

The Regulators, to whom these reports would needs be submitted, would have an invaluable source of data. Whether by tPR or FCA, the analysis of these reports would build a picture of where value for money was being delivered, by whom and in what measure.

But the greatest benefit of all would be to the Trustees (and those they act for). Trustees have difficulties with consultants. Too often they are the supine recipients of advice, too rarely do they push back. Considering the performance of those who deliver performance reviews, puts Trustees back in control – as they should be.

And when we’ve done with them, the trustees might move on to the actuaries, lawyers and auditors…

For the most part, these service providers are invisible to the ordinary members. But when waters get choppy, they become accountable. This from the Mail

A spokesman for Arcadia, Green’s family firm, said: ‘We have no involvement in the trustees’ decisions, their investment strategy, who they talk to, where they put the money. They’re totally independent. 

‘They’ve got advisers. They had a lawyer. They’ve got an actuary. Well, where the f*** are all these people?’

Those that need accountable strong advisers most, are of course the pension scheme members

Which is why the FCA is carrying out its thematic review!

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About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
This entry was posted in consultant, corporate governance, Fiduciary Management, pensions and tagged , , , , , , , , , , , , . Bookmark the permalink.

4 Responses to Value for money from investment consultants

  1. John Belgrove says:

    Well called for Henry and thank you for this post. The following are my personal views only. Maybe I am naïve but I would like to think that most if not all investment consultants would welcome a transparent and objective focus on “value for money” in the provision of advice and in judging the outcomes achieved by their clients. It is natural to ask the receivers of that advice and service (principally the Trustees as you indicate) for their regular verdict although there are complexities and possible conflicts (dare I say that, when clearly ‘conflicts’ within advisers is rightly a focus for the FCA Asset Management Study).

    Contrary to commonly stated points of view (and re-stated here) , I do not find that Trustees to be “supine recipients of advice , too rarely do they push back”. Quite the opposite in fact in my experience and that of many of my peers I know. I have the scars and regular assessments to match as I suspect do most of my industry peers from all brands of firm. Such scrutiny and challenge has been accelerating these past 10 years as trustee governance has increased and more professional trustees have entered the room with experienced points of view. Average Investment Consultancy tenure has shortened too. I think that must be a healthy trend although I do want to later make references to achieving better outcomes.

    With or without the added governance , typically trustee boards have always been well versed in effective scepticism , not just on their own account but ably supported by much 3rd party market noise. Such scepticism should be valued by member beneficiaries of course because all providers of service clearly have commercial conflicts regardless of their operating model. I think the word “independent” should not go next to any investment consultant regardless of the types of advice or implementation routes they offer. Transparency is key and I also encourage the industry and the regulator to pursue this vigorously. Conflicts exist everywhere as is often platitudinously said but understanding which conflicts are acceptable and which are not can only be properly understood in the beaming light of full transparency and focus that itself is un-conflicted by the subject.

    Advisers are all independent in some measures (and different areas for different operating models or firms) but they are never independent of their own commercial interests. As such I also prefer the term “Professional Trustee” rather than “Independent Trustee” etc but industry labels tend to stick and I think some investment consultants truly think of themselves as independent despite their brand or business model obviously not being so. (traditional advisory models have conflicts of churn for example). There is moral hazard perhaps – I also think advisers do really want to work for their clients in a fully trusted capacity almost absent the brand they represent and most brands encourage some degree of personal professional freedom at the point of advice delivery because that’s what the market wants. In summary focusing on transparency , choice and value for money feels the right way to go.

    Commercially savvy (as opposed to investment expert) trustees understand this commercial conflict very well and more often than not decisions to NOT take action have better described the backdrop of the UK DB asset decision landscape. This is typically not the result of an absence of ideas or proposals received by the trustees from their advisers and other third party agents. The great challenge and joy with investment of course is that we deal with uncertainties of future returns and future risks but the certainty of cost. Behaviourally this often biases decisions in favour of certain cost containment versus uncertain return potential or risk mitigation which may not be needed. It’s a safe decision behaviourally but experience tells us it often does not lead to a better outcome. Therefore “value for money” is exactly the right term but measurement is hard. I personally think that a good starting point is to measure along 4 key areas albeit it could get much more complex especially in assessing the important qualitative factors and personal chemistry – much beloved of all adviser selections.

    To keep it simple my suggested 4 key areas (which can be used in combination) to assess value for money of advice are : did the advice lead to : a) Better Returns b) Improved Risk Mitigation c) Lower Cost d) Better information to make decisions?

    Of course variability of timelines often scupper such assessment. A fantastic investment decision measured over the wrong time ( eg too early) will give rise to a very different conclusion for example. Others are waiting for long held beliefs or indecisions to come good that I am more concerned about. Here the most obvious , high profile example in our industry has been present since FRS 17 flipped long term asset decisions 15 years or so ago on their head and actuarial smoothing was consigned to wistfulness. Liabilities discounted at bond yields and pension deficits went “on the balance sheet”. It is not uncommon for many advisers (and certainly me) to be advising clients to “hedge and hedge higher” consistently over time since once that step change took place. But many barriers to embracing LDI existed which I won’t rehearse here. Risk mitigation quickly became a very serious topic but slowly became a driver of actual decision taking.

    Inadequate risk management and extraordinary and persistent market conditions have led to not only the demise of DB provision , but is bringing down companies and jobs. Very sad and very bad PR for Pensions. How do you judge the value for money of hedging advice not taken (for any number of reasons) when the asset owner still has conviction it’s the right thing to do? Clue – my rough back of the envelope calculations suggest the difference between two identical 60/40 (equity/bond) passive portfolios , one fully hedged , the other unhedged is a whopping 150% (yes 15000 bps) difference in total return these past 5 or so years. Professional risk management is not an illusionary game and has spawned the growth of fiduciary management services amongst other solutions for hard pressed sponsors (ie it’s not just the Trustees who are the judge of better outcomes).

    Last Year the PLSA published their 3rd “Investment Consultants Performance Survey” following on from similar in 2008 and 2009. Despite continued and obvious funding challenges for UK Schemes the results continued to show remarkably high levels of customer satisfaction consistent with previous results. Such outcomes apparently do not satisfy critics of advisers who are high on suspicion , although often low on hands-on experience behind the complexities of advice in the context of the personal nature of delivery. Perhaps that’s unfair of me and too defensive – so actually my preference is indeed to dig deeper and strive for clearer measures of value for money , choice and achieving better outcomes.

    Past surveys also point to the complexities of advisory services that aim to satisfy the often unique blend of beliefs , views and budgets at Trustee boards – i.e. investment consulting is a very individually tailored delivery of advice. Today I could not easily tell you what adviser (brand or individual) any given asset portfolio represents. Choice (of product and implementation route) is greater than ever (and possibly part of the complex decision challenge faced by trustees) – resulting in an unhealthy analysis paralysis – also prompting various forms of increased delegation – whether that be , in sourcing to in- house teams and internal CIOs , or more use of multi asset products or more fully delegated service models to third party providers. This does offer trustees clearer accountability I think. These are just some of the choices available in taking on the funding challenge and the ticking clock of maturing schemes with uncertain covenants. Meanwhile some schemes are proving themselves to be winners in these economic conditions and others are falling deeper into trouble.

    It’s very hard to get investment decisions right , especially when our behaviours and policy frameworks are geared to the shorter term . We need skilled investment professionals to execute the trustees strategy and strong advisers that can help the trustees make better strategic choices. Everyone should be open to scrutiny in their conflicts and skillsets and everyone should understand that some decisions won’t turn out so well. Absolutely lets scrutinise the advisers on value for money – and everyone else who contributes to the end outcome and lets strive for transparent , objective and consistent measures as much as possible.

    Sorry to write a reply that is many times longer than the blog piece ( a big fault of my personal style that is not equipped for Twitter length replies) . Even now for any reader that invested time reading some of my comments , I still feel like I’m still skating over many deeper and different points to bring out! For the avoidance of doubt I repeat that these are my personal views only. Thanks again for raising the blog on a subject of obvious relevance to my experience and aspiration for the industry. I certainly have no objections to greater scrutiny (for all firms , not just certain business models or certain types of adviser) and I am hopeful that more progress will soon follow and that the process to achieve that is itself transparent and balanced.

    I would’ve attended yesterday’s Transparency Taskforce meeting on Rational Decision Taking had I not been otherwise committed.

  2. henry tapper says:


    No need to apologise over the length of reply. Clearly there are many consultants who deliver an impressive service and many trustees who push back and challenge.

    The problem is not just with the smaller schemes, many large schemes don’t know what they’re buying (witness Railpen’s admission about their private equity portfolio’s costs).

    If the trustees are honest using your four measures and mark you as they should, would you applaud them if you were found wanting?
    Would they allow you to use them as a reference if they found you excellent?

    I find ratings help, and i’m sure the best consultants would find they helped them too, it’s not them I’m worried about!

  3. Bob Brown says:

    So are you saying Trustees don’t check whether they are getting value for money. Where did they find these people?

  4. henry tapper says:

    Mike, there is no formal way of evaluating whether you’re getting VFM from a consultant, I’m not saying they don’t ask the question, I am asking whether they know how to get the answer!

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