Mike is a senior consultant at Montfort Communications. Until recently he was assistant editor at Financial News and that journalistic pedigree shines through in this remarkable piece of writing.
Though the mills of God grind slowly, yet they grind exceeding small. Though with patience He stands waiting, with exactness grinds He all” – Longfellow.
Two years after the Financial Conduct Authority launched a probe into asset management, the UK’s investment consultants are set to experience the tender mercies of a fresh tormentor.
This follows the FCA’s decision to refer consultants and fiduciary managers to the Competition and Markets Authority. The big consultants, Mercer, Aon and Willis Towers Watson, which are involved in both areas, are facing months, or years, of CMA grind. Other consultants will not be unscathed. But the big three advise up to 80% of market assets and will suffer most.
The CMA can be brutal. Some years back, it restructured the drinks industry, after objections to the way brewers used to sell drinks direct to pubs through tied houses. It later dismembered the UK airport sector. Rather than undergo the pain of a probe into fixed commissions by the Office of Fair Trading, a CMA predecessor body, the London Stock Exchange volunteered to remove fee restrictions and let broking firms sell themselves to banks via the Big Bang of 1986.
It does not take a genius to see that the CMA will be interested in the idea of forcing consultants to get shot of fiduciary businesses, where they take investment decisions on behalf of their clients.
Some say this can lead to conflicts of interest, given that advisory clients and fiduciary clients are fed by the same research departments. The FCA has argued that consultants are too frequently guiding clients towards their own fiduciary arms, with 58% of respondents to a survey conceding this has happened. The personal relationship between consultants and trustees ensures switches are rare across the board.
For their part, consultants argue that fiduciary work subsidises their advisory business, although some firms, such as SEI, have chosen to specialise in it to avoid conflict.
Fiduciary management has pitted consultants against managers, who used to rely on them as a wonderful pipeline for their new business. Smaller consulting advisers have also been stirring things up with the regulator.
But every consultant should tread carefully, not least because the FCA has argued that the entire sector is failing to deliver. It has highlighted, for example, that managers have been allowed to compete on performance rather than fee, which is not great news during periods of low returns. It adds that manager profit margins are 38% – the second highest compared to other stock market sectors, behind real estate.
Worse, the FCA is not convinced that consultants add much value to asset-allocation and manager selection. Quite apart from unbundling businesses, it suggests that consultants could be forced to provide standardised performance data, made publicly available. It says fee structures could be amended. It thinks clients could find it easier to seek redress when things go wrong.
All this could produce headaches across the consulting world, leading to the risk of short term performance being stressed at the expense of long term achievements. It is also fair to add that trustees continue to rely heavily on their consultants – and frequently praise their advice.
Consultants will need to work much harder to show the CMA, and their stakeholders, they are socially useful. They should reinforce their reputations by taking a more public stance on issues such as cost transparency, the environment, governance and long-term investing. They carry out important research in areas such as these, but rarely make an effort to push it outside their client network.
The big three could also try to reach a settlement on the total unbundling of their advisory and fiduciary offerings, rather than the limited offers made to date, in an attempt to avoid damaging performance disclosure.
But when the mills of God are set in motion they are exceedingly difficult to stop.