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My Thoughts
These short pieces are prompted by various pieces of news and how I feel that they will affect the Corporate Pensions community. Please feel free to send me any thoughts and comments that you may have.
Wednesday 17 February 2010
Monitoring and Appraising your Investment Consultants
The role of Investment consultants can broadly be split into to areas - investment strategy and manager selection. In general manager selection naturally follows on from the strategy that is set by the trustees.
With detailed analysis of recommendations and subsequent monitoring of the strategy Trustees will a better chance of being sold unnecessarily complex and expensive investment solutions.
When considering the advice given to them, trustees need to always be aware that a more complex strategy will lead to higher fees for the consultant. There is never a correct answer and trustees may like to consider the comparative merits of a more simple, lower governance solution alongside a more costly complex solution.
I also believe that when considering the implementation of a particular investment strategy the starting point should (where possible) always be the cost of 100% passive solution. Trustees then need to consider the chances that any active solution could produce additional returns over and above the passive solution taking into account all additional fees. These should include not only the additional active management fees, but also the additional investment consultant costs and the time the trustees spend monitoring the arrangements
Trustees also need to analyse the potential for and probability of complex strategies adding value (or indeed losing value if additional risk taken has a detrimental effect on the performance of the strategy). Once all additional costs have also been factored in, they can reach a conclusion as to whether these strategies are in the best interests of the scheme.
Trustees also need to analyse the effectiveness of the consultants manager selection recommendations. This should include the cost of moving the monies between the managers which will have a drag on performance of the assets. Sometimes these costs can be significantly mitigated if the trustees allow a period over which the changes can be made. It should obviously not be forgotten that these should be compared net of fees and costs and compared not just to an index but also index managers - index managers do not always match the index and can give a better proxy of the returns available from a particular market.
This monitoring should be carried out on a regular and consistent basis. Ideally this needs to be carried out independently from the consultant to ensure an unbiased approach.
Thursday 10 December 2009
Is Big Always Beautiful?
As I look at three mergers which affect the corporate pensions environment, I am asking my self - Is this in the best interest of the clients?
The mergers that have brought this to the front of my mind are BlackRock/BGI, JLT/HSBC Consultancy and a little longer ago Towers/Watsons
One of the benefits of merger put forward is the improved economies of scale. I wonder whether these benefits are passed on as lower fees or retained as higher profits?
There will undoubtedly be the opportunity for the new management to ensure that the best talent remains and that this can lead to improved offerings to clients. Of course there are no guarantees that these people will stay after the merger - times like this are great opportunities for head hunters - but every effort will be made to identify and retain the key people.
The mergers can also mean that, if there is real synergy, there can be a wider range of services to offer clients. One stop shops can be very convenient but each of the services may not be the best of breed. There will also be increased pressure to sell these new services to the clients.
There will be some upheaval within the organisations as they are merged and the various processes revised to match new working practices. The largest clients will be targeted to ensure that they are kept fully up to date with any changes. However, it is more difficult to ensure that this level of communication is maintained down to the smaller clients and they may feel that their service has declined.
There is no way we can predict how successful any of these mergers will be - what we can be sure of is that clients will see a change in the service that they receive. For this reason they should monitor the service they get and then review their findings after a reasonable period. At this point, it may be appropriate to carry out a review of the market to check that the service is relevant and competitive
