Investment - Articles - A simple way to solve the CMAs FM from IC conundrum

Xafinity Punter Southall believe that the only way to solve the issues identified in the Competition and Markets Authority (CMA) review of the investment consultants (IC) supplying fiduciary management (FM) is to completely separate the two.

 Patrick McCoy, Head of Investment at Xafinity Punter Southall says: “We believe the only effective solution is to separate FM from IC. Importantly, we also believe FM should be separated from the rest of the consulting business, specifically the actuarial business where the scheme actuary will also advise on investment matters and therefore can influence the trustees’ decision making. This would therefore require ring-fencing of the FM business from the advisory business (IC and actuarial). This should include the complete separation of people, research, tools and remuneration structures.

 “We believe that IC and FM are both credible solutions for trustees. The right choice for each trustee board will be based on their individual circumstances but there is a role for both in the world.“

 The CMA state that 88% of the FM market is dominated by the IC-FMs, which may not lead to clients getting the best outcomes in terms of service or price. The CMA has also highlighted that the costs of moving from an FM are more significant than when using an IC and FMs have not been clear at outset with clients about these costs.

 Patrick continued: “The CMA paper shows 60% of trustees thought that IC-FMs steering clients into FM is a problem. However, 70% of trustees think either that, whilst it may be a problem, it is generally well-managed or that it is not a problem or they don’t know. This is alarming. This highlights that trustees don’t seem to recognise the strength of the conflicts that exist in the IC-FMs which is what we have experienced. As shown by the research, the IC can guide the trustees over time towards a strategy or solution which needs a governance structure that is more suited to FM, hence creating a pipeline of IC clients that convert to FM over time. Such clients, if they had not been introduced to complex, high-maintenance IC approaches in the first place, may otherwise never be in a position of leaping straight to FM. This conflict is inevitable in any IC-FM organisation where management and staff share the benefits of success of an FM platform.

 “A number of possible solutions to help tackle the conflicts within the IC-FM industry have been suggested. This includes further training and information being provided to trustees. We believe this will have little benefit and mandatory tendering will not solve the problem either due to the strength of the conflict within the IC-FMs. We believe the only way to resolve this issue effectively is to separate the FM and IC services and, importantly, the link to the scheme actuary if they are from the same firm. This would include the complete separation of people, research, tools and remuneration structures.

 “A further cleaner step is to require mandatory legal and ownership separation, which in the long run would be good for the FM industry as it will remove the stigma that exists around the cross-selling issue, which would then leave FM as a service to succeed or not on its own merits.”

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