Professional Pensions asks some of the leading providers in the fiduciary management space about this form of investment governance.
1. What are the main differences between types of fiduciary provider? What are the pros and cons of each approach?
SEI: There are a number of different names for fiduciary management providers in the investment world. Outsourced chief investment officer (OCIO), implemented consulting, delegated consulting, and fiduciary management are just a few of the names investors can choose from. But whilst the names of the models differ, the reality is that they frequently offer a similar set of core services including:
- Focus on funding level - the interaction between assets and liabilities
- Investment Implementation - Manager Selection and replacement
- Strategic Asset Allocation - i.e. high level allocation between growth and matching assets
- Detailed Asset Allocation - i.e. asset allocation within growth and matching portfolios
- Tactical Decisions - dynamically adjusting the detailed asset allocation on an ongoing basis
- Dynamic De-risking - exploiting opportunities to reduce portfolio risk and lock-in returns
The most important thing for trustees to consider in investigating this model is to identify a provider that is able to offer a truly bespoke and flexible solution. With a large number of providers to choose from, we point to a few key factors that distinguish proven providers.
- Do they have an established model and long term track record?
- Do they offer flexibility in terms of delegation?
- Do they have a bespoke implementation that can be matched to a scheme's individual requirements?
- Do they have the requisite scale and resources dedicated to Fiduciary Management?
- Do they have a sophisticated platform / infrastructure for making and monitoring investments?
- Do they have a transparent fee process?
When you meet with a prospective provider, it may be useful to utilise the services of an independent consultant or professional trustee if you do not feel you have the knowledge to select and evaluate them, the key here is to find an adviser that is truly independent with no conflicting interests. If you are very clear about your objectives, this may of course not be necessary.
2. How should you measure the performance of your fiduciary manager? What targets are schemes using and what works best?
SEI: Central to a fiduciary management solution is a journey plan customised to client needs and funding level. Accordingly, its performance is relative to individual requirements and simple to measure. It does not make sense to compare performance to that of one's peers who will undoubtedly have a different liability structure and risk appetite.
In practice there are two quantitative ways to measure the performance of a fiduciary manager.
- Relative improvement of the scheme funding level versus the goal
- Relative reduction in funding level volatility
This information is typically regularly and clearly communicated by the fiduciary manager to the client, making performance evaluation simple.
3. How should schemes assess the total cost of a fiduciary manager?
SEI: Schemes are urged to look for providers who provide straightforward, all-inclusive, and completely transparent fees. They should be ad valorem; that is based on the value of assets under management. Under this arrangement fees are correlated to the performance of the fund and Trustees need not worry about being charged for extra contact and services.
4. How are fiduciary solutions adapting to changing market dynamics and demand?
SEI: In its early incarnation, Fiduciary Management was perceived by some as an extreme form of governance which amounted to trustees relinquishing responsibility for the scheme. The change we are witnessing now is that trustees are becoming more familiar with the benefits of the model which takes a holistic view of assets in relation to liabilities and does not require full delegation. Providers are in turn responding by providing solutions that offer a higher degree of customisation and flexibility for schemes.
5. Does fiduciary management always have to mean full delegation?
SEI: No, this is a common misconception in the marketplace which may owe its genesis to the number of providers who offer ‘standardised', ‘off the shelf' solutions. The reality, particularly for global Fiduciary Managers who have the requisite scale and resources, could not be further from the truth. Fiduciary Managers do not demand a high level of delegation; it can be as little or as much as the Trustees deem necessary for their specific needs while still maintaining their oversight responsibilities. Providers should offer a customised approach to delegation that leaves Trustees fully in control, as they can decide which parameters the Fiduciary Manager operates within. These parameters should be adaptable according to the profile of the scheme.
Trustees need to decide what works best for their needs. A sensible approach for Trustees considering possible areas of delegation may be to identify those areas of governance where they hold a high degree of internal expertise and to ascertain whether this has a high impact on the funding level. Where it does, then this is perhaps an area where the Trustees should be focussing their time and efforts. Conversely, in areas where the Trustees possess a lower degree of expertise or are not valuable to the funding level, then it may be prudent to delegate these responsibilities and free up more time to focus on the higher value-added areas.
