A subtle difference

Fiduciary management and implemented consulting have more in common than many people realise, suggests Lynn Strongin Dodds

W hat's in a name? Just ask institutional investors when assessing the merits of fiduciary management compared with implemented consulting. They may sound different but strip away the marketing material and both concepts are practically the same. They involve trustees outsourcing part, or all, of their investment decision making process to a third party. In a worsening economic environment, the trend is expected to gather momentum.

Fiduciary management is not a new concept. It has been a firm fixture on the US and Australian pension fund scene for a number of years and has found a welcome spot in the Netherlands. In the past seven years, third-party fiduciary assets under management in the latter country have mushroomed to around €300 billion, according to data from Avida International BV, an Amsterdam-based independent consultant specialising in fiduciary management.

More recently fiduciary management and implemented consulting have been slowly taking hold in UK pension fund circles, on the back of similar trends that have swept across the Dutch landscape. Contributing factors include a move towards specialist mandates plus the introduction of the FRS 17 accounting standards, which have sharpened the focus on a scheme's risks and liabilities. This gave rise to liability driven investment strategies and more complex investment tactics.

Although there are shades of grey, both concepts broadly follow the main tenets laid down by Dr Anton Van Nunen, academic and principal of consultancy Van Nunen & Partners, who developed the Dutch model. He believed that fiduciary management was an organisational device that encompassed five tasks: advice, portfolio construction, manager selection, monitoring of managers and reporting.

In some cases, institutions opt for the full package. This entails providers producing an asset- liability model, defining the risk budget and then developing a strategic asset allocation strategy that generates the optimum risk and return profile to meet a scheme's particular requirements. Others prefer the partial route, where they might outsource a component of their strategy such as alternatives.

Overall, though, as Marek Siwicki, head of consultant relationships at Gartmore, puts it, "I do not really see any major differences between fiduciary management and implemented consulting. The main objectives are fundamentally the same – to take the decision making process away from the trustee, develop the best asset mix and choose the right managers in order to meet the particular needs of the scheme."

Accounting for taste
A closer look suggests that the main dividing lines between the two can mainly be found in the provision of the service. In the Netherlands, the fund management groups tend to be the leading lights, with Goldman Sachs Asset Management (GSAM) credited as being a pioneer in the field. In general, household fund management names tend to nab the blue chip prizes. For example BlackRock, which, as Merrill Lynch Investment Management, nabbed the electronic giant Philips' fiduciary mandate in 2005.

By contrast, in the UK, investment consultants are the dominant players in the pension fund realm and have developed their own branded version. Hence the name – implemented consulting. It reinforces their business model and is seen as a natural extension of their traditional advisory practice. It also enables them to add to their stable of value-added products. In fact, some market participants argue that advice has become commoditised and this is a way to capture a larger slice of the revenue pie. Firms such as Watson Wyatt and PSolve have been in the game for years, while others stalwarts such as Mercer and Hewitt have been bolstering their service offering over the past 12 to
18 months.

As with advice, there is no 'one size fits all' service as trustees need to set boundaries and have the final decision about the overall objectives of the fund, according to Zuhair Mohammed, principal in the global investment practice and head of the delegated consultation service for Hewitt. "We tailor our services depending on their particular requirements. There is directive consulting, where we help set the agenda and offer firm recommendations on a course of action, but trustees sign off on every decision to a fully delegated approach where we take full responsibility in choosing the asset mix, managers and capturing market opportunities when they arise," he explains.
Michael Kinney, head of Mercer's European implemented consultancy services, says the type of service a client requires often depends on the size of the scheme. "We see that small to medium-sized plans, which have limited resources and a small governance budget, tend to opt for a full outsource ranging from the strategy piece to full implementation. Larger plans are split between those that hand over everything and those wanting a partial outsourcing of a particular strategy."

Slow progress
To date, fund managers have not made any serious inroads into the UK. Some believe this lack of progress can be attributed to concerns over being blacklisted by investment consultants in the beauty parades. As the business has developed though, fund managers have stepped up their efforts. Not surprisingly, each group believes it brings something unique to the table. According to Mohammed: "There are conflicts of interest in any form of consulting, including the traditional advisory model, so consultants have to work hard to retain the trusted advisor status and manage such potential conflicts. Unlike fund managers they are free to select best of breed providers in a totally objective manner."

Fund managers, on the other hand, argue they have the investment acumen and expertise to navigate clients through these turbulent times. Andrew Dyson, managing director and head of European institutional business at BlackRock, says: "In the UK, investment consultants have a strong position. They were looking to change their business model and the service has grown out of their natural relationships.

"However, I view implemented consulting as a form of fiduciary management. Providers have different propositions on how they will deliver performance to trustees. The big difference is that it is about taking decisions, as opposed to providing advice. Fund managers have always been accountable. It also comes down to the quality of the risk analysis, which at BlackRock is an integral part of the proposition."

Dyson believes things have changed over the months since September. "In the autumn, the penny suddenly dropped and trustees are realising that in this more complicated world, it is difficult to do everything. They are looking to outsource more of their investment decisions and the competition between fund managers and investment consultants is increasing."

According to John Conroy, a managing director consultancy at PSolve, the lines that separate the two groups are beginning to blur. "Clients want their consultants to be more involved, more accountable and more able to demonstrate the added value they're providing. Fiduciary management is one way to do that.

"However, consultants should be honest about the fact that they are offering asset management services. Implemented consulting is like being a little bit pregnant. You can't be – you’re either running the money or you're not. As for fund managers, I have frankly been surprised that there are not that many firms who have become involved although I think this will change going forward."

All market participants agree, though, that the seismic events taking place this past autumn – starting with the collapse of Lehman and the financial crisis that ensued – has altered the way trustees look at their operatus mondi. Patrick Disney, managing director of the European Institutional Business, a manager of managers group, says, "The industry is at an inflexion point with the turbulence in the market highlighting the flaws in their investment decision making process. Trustees have realised that they need to make decisions quickly and cannot wait for the quarterly meeting. It is more effective to have a fiduciary manager."

WRITTEN BY LYNN STRONGIN DODDS, A FREELANCE WRITER