FCA interim market study shines spotlight on investment consultants

Interim findings of The Financial Conduct Authority's (FCA) Asset Management Market Study showed concerns over the lack of competition and transparency in the investment consultancy market.

In the findings published on 18 November the FCA announced it is to consult on whether to make a market investigation reference on the market to the Competition and Markets Authority (CMA). This is the first time the regulator has exercised this power.

The study also contains a recommendation that the provision of institutional investment advice is to be regulated by FCA.

The report found the market to be heavily concentrated, with 60% of market share being taken up by three firms: Aon Hewitt, Mercer and Willis Towers Watson.

Despite the range of consultancy firms operating in the market, the study showed that 91% of investors have not switched consultants in the last five years. While the process of switching consultants was neither difficult nor costly, respondents said the time and resources needed for a tender process acted as a deterrent.

Punter Southall head of investment consulting Danny Vassiliades called the report "an important and necessary review" and welcomed the recommendation to the CMA.

"There is a clear requirement for more competition in the investment consulting market. Currently, the industry is dominated by three large providers," he said. "We believe this has a number of negative consequences for pension schemes and the market more widely."

He added: "Schemes can get a great service from any number of consultancy firms and there is certainly no restriction on good consultants out there."

Aon Hewitt head of UK investment consulting Tim Giles also welcomed the review but disputed the idea that the dominance of three providers was a negative: "We welcome anything that improves both the competitiveness of the market and the outcomes clients receive," he said. "We do make up a large part of the consulting market but we are in this position because people want to work with us. There are a large number of companies operating within this area and there are no real barriers to clients moving if they wish to."

Measuring performance

According to the report, while investment consultants undertake valuable due diligence for pension funds, they are not effective at identifying outperforming fund managers.

Difficulties were also found in clients being able to assess and monitor their investment consultant. This was seen to be a particular issue for smaller pension schemes.

According to the report, the information presented "was at times difficult to understand and important factors were not always highlighted. This could lead to poor performance not being communicated or being easily disguised."

However, LCP partner James Trask believes it is difficult to publish information showing the success of advice given: "It is a challenge to publish information to show how successful your advice has been as there is no standardised way of doing this," he says. "The adviser may not even be the one who makes the final decision. The client could make a decision that wasn't the adviser's choice. It is easier to monitor in something like fiduciary management where the decision is made by the consultant but otherwise it will be difficult."

According to the regulator, providing schemes with clearer information will put trustees in a better position to challenge their consultants where necessary.

Commenting on the report, the FCA's executive director of strategy and competition Christopher Woolard said: "The principal issue here is that, from a legal point of view, trustees are reliant on their consultant's advice. They need to have the necessary information to be able to push back and challenge the advice they receive where necessary."

However, Vassiliades says that schemes regardless of size are challenging their consultants and that it is something to be welcomed: "We do get challenged by our clients, regardless of their size, which is vital in ensuring schemes know they are getting value from the advice you provide. It may be the case that larger schemes may have more expertise and so might challenge a bit more but we recognise challenge from schemes of all sizes."

Fiduciary management

The report also highlights concerns around the adoption of fiduciary management by consultants. While the report identifies that a firm recommending its own in-house fiduciary management survey was not necessarily problematic, there was an incentive for consultants to recommend such a service even when a client might be better served by another model or provider.

Some asset managers also highlighted the conflict of interest this model brings. Some said they were concerned they had to share the details of their products with the investment consultant to receive a rating. However, the investment consultant could then take those ideas and use them to develop their own product.

Cardano head of clients Richard Dowell believes the report could really help the industry to move towards a more transparent way of doing things: "It is good to see the FCA has listened to the industry and made a number of positive statements especially around fiduciary management where there is an ongoing lack of transparency around fees and performance."

He continued: "We would like to see a standard being developed and I would dispute anyone that says this is too difficult to do. We have published our track record for several years and if we can do this then the others can as well." 

The interim findings of the FCA's report show the regulator is willing to take a thorough look at whether the investment consultancy market is working in the right way for its users. It will be interesting to see what the final conclusions will be in next year's report. However, so far it seems clear that investment consultants will need to look hard at the advice they offer to clients to ensure they can demonstrate where they have added value.