Advisers turn the key to the FCA’s fund governance condundrum.


One of the recent themes of this blog is  “What rights we have over “our money”. John Kay’s book – “other people’s money” argues that the money held on account by asset managers should always be considered as held in trust with the manager of the account of pooled fund “a fiduciary”.  But in practice, the person for whom the money is managed is so distant from the fiduciary that neither side has any meaningful relationship.

I have noticed this in other areas where assets are managed by third parties. In horse racing for instance, the owner of a horse and its trainer appear to have a direct relationship but increasingly owners are syndicates and it is syndicate managers and other intermediaries who act for those putting down the money. It is left to the owners to have a few minutes with the horse before and after the race.

There was a famous debate between the man who ran an investment consultancy and the man who ran a fiduciary management company which ended up as an argument about whether you should put your kids in boarding school. The debate focussed on whether you fully outsourced the management of your child to a third party or shared the management with the school. The debate ended up, as debates on equine stewardship do, with intermediaries squabbling between each other while the owner is excluded from the room.

The FCA’s recent Asset Management Study is very good on this question.

It’s  main suggestion is that the FCA places a duty on asset managers to act in customers’ best interests. 

While Authorised Fund Management  (AFM) boards have duties to act independently and in the best interests of investors, they do not currently have an explicit and well defined obligation to seek value for money for them.

We (the FCA)are considering:

• Placing a duty on asset managers to demonstrate how their funds deliver value for money to investors

• Reforming governance standards for UK authorised funds to ensure asset managers are held to account for how they deliver value for money. In doing so, we might draw on the US model for fund governance

• Supervising and referring for investigation issues related to any new duties and governance standards.

My suspicion is that this reporting is not going to be directed at the consumer but at the intermediary. Funds are generally owned by insurance companies who re-sell the asset management to consumers from a platform. This primary relationship is like that of the trainer and the syndicate manager.

Wholesale money

As can be seen by my frustration at understanding what the hell is going on at People’s Pension, there can be a range of intermediaries and governance structures between the member and his money. It is difficult – even for an expert – to know who to address the question to. In the case of People’s Pension, there is an insurance company (B&CE) insuring an insurance (pooled) fund , created by the insurance division of an asset manager (State Street Global Asset Managers). The Trustees of People’s Pension are themselves a long way from the managers of the money, the members of the People’s Pension are even further.

I fear that these long reporting lines are going to make the FCA’s task (detailed above) all but impossible. The State Street AFM may disclose to the board of B&CE (who are Governed by the B&CE Independent Governance Committee)and B&CE may disclose to the Trustees of the People’s Pension Master Trust, but the member of People’s Pension will be dependent on three separate fiduciary mechanisms to be sure his or her interests are best served.

There may be investment consultants acting for the members (in the pay of employers) but – as my own experience highlights – even they may struggle to penetrate this miasma of governance arrangements and agreements.

Retail Money

The issue is exactly the same in the retail space where an investor relies on an adviser, a discretionary manager of funds, a platform manager as well as a fund manager (+custodian) to deliver in his interest. Here the pot-pourri of governance structures might include a number  of IGCs, and  AFMs as well as the terms and conditions of the advisory agreements. The complexity of these agreements makes what started transparent- opaque and what was meant to be clear, obscure.

The problem with these retail chains is that there is no ultimate fiduciary and no look through to the next level of governance. While we might reasonably expect the trustees of the People’s Pension to escalate an issue (such as my questions about stock lending fees) through to source, the same cannot be done at a retail level. There simply is not the level of expertise working for the end user.

Comparative levels of care

My worry about the FCA’s governance proposals rest with the complexity of the reporting chains, not with the reporting itself. If for instance the asset manager’s AFM reports accurately to an insurer, can we expect the insurer (and it’s IGC) to treat the next customer fairly. If that next customer is an adviser rather than the end user, can we expect the regulations around advisory behaviour to ensure that the relationship between the AFM and insurer/IGC is clean? Is the member getting value for money from all levels of the intermediary chain and who is there as the ultimate fiduciary?

Although the problems are fewer in the institutional world (where there is greater economy of scale), the problems are the same. They are systemic – there is too much intermediation.

A model for the future?

I was speaking recently with someone hoping to offer next year a simple product which allows people to buy funds straight from the source (Vanguard,Fidelity and BlackRock). The idea was that for an all in fee of around 0.5% , an individual would get a solution to the problem “what do I do with my money?”. The value of the proposition was not in what was in the product, but what wasn’t. The AFM statements of Vanguard, Fidelity and BlackRock would be the only statements you’d have to read.

This simple way of managing affairs means that the specific duties that the FCA want to entrust to fund managers might be explicable from one end of the chain to the other.

• among other factors they decide,

. considering the reasonableness of the fund’s fees, including any performance fee

• considering all direct and indirect expenses and charges met by the fund, including transaction costs

• considering whether it is in the interests of investors to institute tiered fee breakpoints at specified asset levels, or alternative fee arrangements, in order to share economies of scale with investors more effectively

• considering whether there are practices happening in the fund which are not in the best interests of investors, such as the fund manager taking ‘risk-free box profits’

• to perform an annual, arm’s length reassessment and, where appropriate, renegotiation of the investment management agreement (IMA) with the asset management company

• to make public an annual report detailing its activities in reassessing and renegotiating contracts and how it is ensuring value for money on behalf of the fund and its investors

Who’s money is it anyway?

The fundamental questions of ownership (addressed at the start of this blog) are critical to the FCA’s Asset Management Study.

In my view, good governance need only be done once and if we are worrying about assets, it should only be done at the asset management level. The FCA’s proposals for asset managers are sensible and enforceable. But though they may bring value for money from the fund, they do not ensure value for money for the consumer. For that to happen the various agreements between funds-platforms-DFMs-custodians – Advisers and clients have to all work.

There are just too many agreements and too many governance bodies for regulators to properly regulate and consumers to be properly protected.

The end result is the proliferation of fees that adds up to an amount so far north of 0.75% to make workplace pensions look- even in their most expensive form, a VFM haven.

Adviser’s are the turn-key to the problem and its solution

Ultimately there needs to be a sense check on the propositions being brought to market and here I see the Regulator having a crucial role. If advisers (whether wealth managers or investment consultants) are delivering solutions to client problems at a cost that renders those solutions patently unworkable, the Regulator needs to call those advisers to account.

For that reason, I am ultimately a fan of the FCA’s approach. Advisers are the problem and the solution. The referral of the investment advisory community to the CMA is something that I wholely support.

Advisers have the capacity to shorten or lengthen the intermediary process. They can ensure or destroy value for money, they can solve or create the problem.

The obligation on advisers should be very simple; show us your value or get out of town.

About henry tapper

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