The fallen Icarus – wings clipped when he flew too close to the sun

It shows the distance between the consumer and the investment consultant that all but a handful of readers will know what this headline refers to. To the general public, the Competition and Markets Authority’s probe into the opaque world of investment consultancy is an irrelevance. Fiduciary Management – quoi?

But of course the CMA referral of investment consultants  by the FCA was and remains massively important. It trims the wings of a small coterie which had lost accountability, assumed invulnerability and were pretty well unsupervised.

The 300 page report into the matter, published yesterday, is considered a major event by the coterie, though it’s a bit of a yawn for the rest of us.

The High and Mighty got off lightly

The headline sanction (remedy) was to have been the break up of the oligarchies at Aon, Mercer and WTW so that the consulting and investment management businesses operated independently of each other. The CMA thought better of this, no doubt under considerable pressure from the various lobbies within this arcane world.

I’m not overly fussed, so long as these businesses recognise that pension schemes are customers and not cannon-fodder, the CMA will have done its job.

The sanctions (remedies) that they are recommending include some tough asks. Investment Consultants will not find the FCA an easy organisation to be members of , they ask awkward questions and have a habit of closing you down if you don’t do what you should.

I’m less impressed by the sanctions (remedies) on the buy-side. At the heart of the problem, is that consultants have trustees in their pockets. This is no longer as overt as it was (not so long ago – corporate hospitality had choked any separation like Japanese knotweed). Nowadays, the thraldom is more subtle (though no less insidious). One consultancy has set up a social media website for trustees which gives them the opportunity to go to “university” to discover the complex products provided by investment manages over a posh meal.

The implication that such products need a university education is flattering to trustees who can – at least for the five courses- believe themselves part of the elite with whom they dine. But do we really need a degree in astro-physics to design and operate an investment strategy for pension scheme members?

The CMA should also be looking at pension trustees and helping them to raise their game. The investment consultants didn’t get where they are today without their being real problems on the buy-side (NB -tPR).

Hubris and how to avoid it!

My view is that investment consultants have elevated their profession to a level that it has assumed Olympian powers of intelligence . The reality is different and the CMA have chosen to treat investment consultants, not as numeric Gods, but as mere mortals.

Perhaps this is for the best. Some of the people at the top of the investment consultancies are really good blokes, reading the report, I get the impression that during the investigation, some pennies dropped. I suspect that the best work of the CMA was in helping the good guys down off the pedestals they never really wanted to stand on!

Vertical disintegration

One of the central themes of the investigation was the conflict created by consultants who considered they could be rewarded from the funds they managed. This practice is well known to lesser mortals (IFAs) who have been struggling to get paid in much the same way. IFAs can still be rewarded from the funds they manage through a process they call “virtual integration” and they justify this by claiming their interests are aligned with their clients. If funds went up and down because of the influence of advisers, then I’d accept this argument, when the funds are tracking markets, this makes less sense.

So with investment consultants. Their seems little accountability for the influence the strategies they recommend (or implement) in the reward they receive. Where consultants are paid on an ad-valorem fee from the fund, the quantum of the fee is set high enough that a reasonable profit can be assured in a bad time and when times are good – the investment consultants are in clover. While investment consultants are keen to explore “risk-sharing”, it is very rarely they who share the risk!

Breathing again

It could have been so much worse for the big investment consultancies and they know it. The FCA may be feeling that they may have rather over-estimated the size of the problem. Take for instance the FCA’s dismissal of consultancy master trusts

47. We have found that the potential conflict is unlikely to be leading to a competition problem at present, as we found that the master trusts of investment consultants that also act as employee benefit consultants currently have only limited take-up. https://t.co/LU1ObIxqFY

— Pension Plowman (@henryhtapper) July 18, 2018

I would agree with the CMA and probably with most of the public. The activities of investment consultants just aren’t as important as investment consultants think they are!

Perhaps this is a lesson learned. For once, the investment consultants have not been puffing themselves up but breathing in. Instead of exalting their  intellects, they have been reminded of the fate of Icarus, who – flying too close to the sun, found his wings melting and him falling fast to his death.

The moral of Breughel’s great painting is that while this matter of Olympian importance was going on, everybody else carried on their business as usual.

Maybe the most important thing for investment consultants to learn from this report, is that they’re really no different from anybody else.

Icarus falling – business as usual?