If you had to pay for advice – would you pay for judgement or luck?
Con Keating makes an important point in response to my blog, in denial and in disgust
it is required by statute to retain an investment advisor. It is not so much that clients want to work with consultants but that they have to work with one or another. This needs to be changed.
Michael Johnson has today called for 80% of the fund management industry to be considered redundant. I do not disagree with his argument. But it ignores Con Keating’s point. You cannot simultaneously make 80% of investment consultants redundant without putting yourself the wrong side of the law.
This seems the single strongest argument for referring investment consultants to the competition and markets authority. Johnson may not know of the requirement on pension scheme trustees which might explain his comment
“It is not clear how (a referral to the CMA) would help”.
One alternative to a referral is to change the law and give trustees the freedom to take decisions by themselves with regulatory and commercial impunity. But the FCA report paints no more optimistic picture of trustee competence than the OFT did of employer’s capabilities with workplace pensions.
Experts are needed to advise on and help deliver diversification and ensure liquidity (as Johnson points out), but these experts are not embedded in most occupational pension schemes or other fiduciary structures in the UK.
Another alternative is to follow the PLSA’s recommendation to collapse occupational schemes into large pools which can be managed with the interests of all in mind. This is what Johnson wants too and he spends much of his paper praising the Department of Communities and Local Government for its leadership in bringing Local Government Pension Schemes in just such structures.
The difficulty of extending the LGPS pooling model to private schemes is inherent in the terms “public and private”. Public pensions are heterogenous in benefit structure and in sponsor (we the tax-payer pick up a general tab). Private schemes have different benefit promises and each sponsor is different both in its capacity to support the future promises of the pension scheme.
The logical argument for Michael Johnson , would be to nationalise pensions and place the burden for private defined benefits in one great pool (under the management of Government agents such as the PPF). This may be a step too far for a right leaning think-tank like the Centre for Policy Studies, but there are some sane experts calling for a “living PPF”.
Evolution not dissolution.
Johnson argues for the dissolution of the fund management industry with 80% of its structure being dismantled and the remaining 20% targeting genuinely valuable activities.
But we don’t have to treat asset managers and investment consultants like medieval monasteries!
There is an opportunity, with a referral to the Competition and Markets Authority, to clip the wings of the fund managers and investment consultants so that they focus on the jobs that Johnson properly wants them to do.
Licenses to manage money actively, or manage managers within funds or fiduciary management agreements , can currently be obtained with virtually no regard to the value for money offered to the consumer. The CMA has powers to link the performance of those in asset management (including consultants) to results, thereby asking asset managers to underwrite their activities.
The evolution of fund managers into risk sharers suggests that they may well return to where they came from – the insurance industry.
Ironically, insurance companies initially managed funds for policyholders as a risk management activity, in the purest sense, the guaranteed endowment or annuity is a fully insured fund management activity. We now have insurance companies that take no investment risk at all and fund managers who will point to insurers (they use for distribution) as the risk takers.
Payment by judgement rather than luck
It may be that the answer that the CMA comes up with, if investment consultants are referred to them, is to make investment consultants pay linked to the outcomes of the advice they offer (or for their activities to be limited as Johnson suggests). I would support such a proposal.
I do not mean by this an “ad valorem’ approach; this means that the quantum of the reward is based on market performance with the majority of the fee payable in any market condition (a beta approach). I mean a fee based on the “alpha” of investment consultants, payable only where it can be shown that the consultants added value by judgement rather than luck.
I suspect that few asset managers or investment consultants would back themselves to consistently get paid on that basis.
