Legal and General’s announcement that they are launching a fiduciary management service was no great surprise. That said, their mix of active allocation and passive fund management should make a great addition to an already crowded market.
It’s important, however, that trustees don’t fall for the sales hype and much talked about momentum. Fiduciary management is designed to fix a particular problem and it is not the only fix around. In this blog, we’ll just a step back and look at the problem.
What’s the problem?
Pension vehicles are, of course, very long term in nature and, as such, can and should take a long term view on investment matters. That said, there is a sensible balance somewhere between trustees attempting to daily trade and having a 40 year “set and forget” strategy.
The archetypal (and perhaps now cliché) model for a traditional trustee board was, amongst other things, that it met four times a year. The consensus view, not just driven by the fiduciary managers, is that that is not frequent enough, in relation to investment matters, for most trustee boards. The days of commissioning an investment report, having it delivered three months later, asking some questions and getting the answers three months after that, then making a decision that took another three months to implement are now seen as the bad old days.
Fiduciary management (also known as delegated consulting, implemented consulting/management, flight path management and various other aliases) is a tool to settle the balance a little more in favour of proactivity.
By exercising their power of delegation the trustee board can pass some degree of executive function to another party. The degree of delegation can be defined by the trustees (although different providers will have different limitations) and the delegated party will then act freely within the space so given to them. The idea is that the fiduciary manager will be better placed to make and execute decisions at an appropriate time.
Does it work?
Yes and it can and does do good work, but there is a cost to it. The challenge for the trustee, in consultation with the sponsor of their scheme, is to determine whether the benefits outweigh those costs and there are no easy answers to that conundrum.
What’s all the hype about?
Fiduciary managers have been operating in the UK for only the last few years, but the principle of delegating investment function is as old as the oldest pension fund. From big scheme to small scheme there has always been delegation to some extent; whether its asset allocation or stock selection. No one fund executes all parts of the investment process from trustee table to the stock market floor.
What is new, in fiduciary management, is, firstly, the label and, secondly, the commercial offering. The hype is driven by a formidable, and well resourced collective marketing machine that taps into the sense of inadequacy derived from the cliché model of an archetypal trustee board. The subliminal message is “you’re not doing this as well as you should be – let us help”.
So is Fiduciary Management the answer?
It can be...
But before you get caught up in the hype, you need to ask yourself three things: (a) what do we actually want, (b) what’s wrong with what we are doing now and (c) is this the right answer right now?