Nobody saw it coming. I went to a conference of investment consultants earlier in the month, the FCA’s Market Review was not on the agenda of any of the day’s sessions.
But the FCA’s proposal to make a MARKET INVESTIGATION REFERENCE about investment consultant to the COMPETITION AND MARKETS AUTHORITY has come as a complete surprise to the investment consultants I know.
They have been (to use one of their favourite pieces of jargon) “blindsided”.
As readers of this blog will know, I have very little time for investment consultants who are male, pale, grey and stale. They are generally overpaid, lazy and complacent. They have operated in a regulatory penumbra between the Pensions Regulator and the FCA and have generally considered themselves above the law.
The FCA’s damning report of their slack processes, inadequate controls, poor reporting, lack of customer focus and ignorance of what value for money might mean to their customers is laid out in a sustained assault that occupies pages 140 to 170 of the report. The specific remedies suggested to address the inadequacies of investment consultants is addressed on pages 197 to 200 of the report and again in MS15/2.2a.(with detailed reasons in chapter 2 and 3).
I’ve read reports that this is a case of “here we go again”. This misjudges the tone of the review and the severity of its proposals.
In many ways the findings mirror those of the OFT – the FCA identify
- A weak demand side
- An inability (among investors) to assess the quality of advice provided by consultants
- Persistent levels of concentration and relatively stable market shares among investment consultants
- High barriers to entry and expansion, particularly the inability of smaller or new consultants to develop their businesses outside of niche and specialist areas
- Vertically integrated business model (fiduciary management)
If anyone within investment consultancy (and that includes those in the smaller or new firms (like mine), underestimates the impact of an MIR then they are foolish. This was precisely what the Insurers were so desperate to avoid following the OFT report into workplace pensions in 2014.
I contributed both to the main review and to the Tilba research that fed into it. I did so on my own behalf and as part of the Transparency Task Force teams that visited the FCA over the period of the review. I am a grain of sand on the beach.
It would appear that the FCA have had direct access to advisers and investors. It would seem that rather than being supported by asset managers, investment consultants have been damned by them. This appears to be because of the increasing conflict between asset managers and advisers offering fiduciary asset management).
It would be wrong for me to focus just on investment consultancy. The bulk of the paper deals with the shortcomings of some parts of the asset management industry, specifically the high value active management which is clearly not delivering value for money most of the time.
There are a number of very interesting suggestions within the body of the paper, most specifically around strengthening the governance of funds by asset managers, the measurement and disclosure of costs and charges and the strengthening of the buy-side.
But these are relatively minor in their severity by comparison with the opprobrium dished out to investment consultants.
Why pick on the consultants?
This may be the question considered over the Saturday morning breakfast. The answer is in the title of this blog. That investment consultants didn’t see this coming is because of the extraordinary complacency that has developed amongst their cosy club.
The report picks out Willis Towers Watson, Mercer and Aon as controlling 60% of the market, there are some challengers -Redington, LCP , Punter Southall, Hyman Robertson, Barnett Waddingham, Russell and then a group of much smaller actuaries and freelancers who feed at the bottom (of which my firm is one).
On the buy side, the independent trustees, have also been complacent, allowing this oligarchy to perpetuate. The principal trade bodies, the Investment Association and PLSA have done little to raise the bar. Finally the trade press have been particularly supine in challenging the practices of investment consultants.
Of course there are exceptions (and regular readers of my blog know I consider them to be) but for the most part, investment consultants have been regarded as an essential ingredient in the gravy train that has kept so many in the pensions industries in Ferraris (and in pension terms – in Lamborghinis).
Why pick on the investment consultants? Because almost every point in the 30 pages of the FCA’s interim review is right.
The FCA expect to publish their final version of this review in 2017. I hope that we will not have to wait till the “autumn” of 2017. In the meantime we will have a consultation on whether the FCA are being unfair on asset managers and investment consultants. No doubt the trade bodies and the trade papers and all the other dependencies of the Investment Consultancy “industry” will “welcome” the report and spend the next three months undermining it (we have till Feb 20th 2017 to respond).
I am not in the pocket of the investment consultants , nor the asset managers or indeed in anyone’s pocket. I believe First Actuarial (my firm) have much to think about following the publication of this review and hopefully we will review what we do to make sure we are not liable to censure. But I would be very surprised if we did not agree with the body of the report and support the MIR to the CMA.
The insurers got themselves off the hook by adopting IGCs and excepting a charge cap. I do not see the investment consultants having similar wriggle room. For too long, trustees (both DB and DC) have not got VFM from investment consultants. Investment consultants have abused their considerable powers to advise and often fallen way short of the standards that should be expected of them.
The interim should be a period of reflection not of protest. I see investment consultants as awaiting trial. They can use the interim to clean up their act , looking at each clause between pages 140 and 170 and asking to what extent they are guilty.
I have no doubt in my mind that the vast majority of investment consultants have failed their clients – the question is in degree. It is not their individual but their collective problem. It is a problem that the FCA has rightly identified and is taking the right steps to remedy.
If any investment consultant wishes to take issue with me on these pages, you are welcome, but like the FCA – I am in no mood to pull my punches.