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Sunday, 22 January 2012

Fiduciary Management - Jury still out?

What is Fiduciary Management? Some also use the term 'implemented consulting', but whatever you call it there are various definitions and opinions that abound. The more cynical trustee might be forgiven for being suspicious about big brash American owned consultants or investment banks selling 'products' that are akin to offering umbrellas after it's stopped raining, but the concept deserves a closer look in my view.

We have seen that increasingly trustees and employers have become frustrated with, perhaps, the odd missed opportunity, the dreaded procrastination, and these regrets may have fueled demand for delegated services where professionals can act quickly and with defined objectives within carefully constructed parameters.

The toolkit available to a pension scheme these days is such that not many trustee bodies necessarily feel confident enough to act quickly, potentially entering into multi-million pound derivative contracts to 'lock-in' to what may seem attractive market opportunities, interest rates or inflation levels. Therefore some form of delegation to either a joint committee or professional firm that has the technology and specialist knowledge to monitor assets and liabilities as well as the financial markets sounds like an attractive proposition.

In an ideal world we could all take a very long term view and wait for our diversified portfolios of quality assets to eventually come good, and as long as the day to day cash flows of the scheme were covered then time would hopefully prove to be a healer. However, as Abraham Lincoln said, 'Things may come to those who wait, but only the things left by those who hustle'.

In reality the majority of schemes and sponsors are now looking to manage the 'end game' and the eventual self sufficiency goal or buy-out. Given the number of potential booby traps along the way, and despite attractive phrases such as 'glide paths' or 'flight paths' what we really know is that it feels more like chasing a pigeon out of a supermarket!

Trustees and sponsors that have a desire to rid themselves of defined benefit liabilities may want to keep control of all the levers, but how many will invest enough resources to enable effective control and management of portfolios worth hundreds of millions of pounds or more?

Those that are perhaps still in denial will continue to hope that they will get it right eventually, and some will bite the bullet and accept that they need help and may need to delegate more.

There is no predefined service that trustees have to buy despite what one might think. Trustees can devise their own model which could be a form of delegated manager selection, or fund of funds perhaps, and for some a joint committee type approach with consultants taking a more pro active part in driving for quicker decisions and tactical moves.

For smaller schemes the more integrated trustee investment service solution, where more or less everything is delegated, could be attractive and the right answer where governance constraints and cost preclude a bespoke approach.

A word of caution, however, we are all aware that most things are a 'zero sum game' and we can't all be winners. Just as the majority of active managers under perform it could be that as more consultants/banks get involved in taking decisions then some will inevitably get it wrong and that could see Trustees' patience being tried.

There are undoubted risks in delegating to professionals. We should not forget how triple A asset backed funds were widely misunderstood in 2007 and 'you don't stop dancing 'till the music stops' and 'when the ducks quack you feed them' quotes about selling suspect packaged securities to investors. These market professionals don't always get it right! There is also the question of how many clients they could potentially have competing for trades or their undivided attention. Is their desire, loyalty and affinity with the scheme or employer the same as a trustee body has with a true fiduciary duty and responsibility?

Let us finally not forget about cost and the extra layer of fees that may or may not be material. Professional indemnity fees have to be paid for and some large schemes have even hired additional firms to watch what the delegated manager is doing! But, although the jury may still be out, these delegated solutions are here to stay. It is surely better to have an honest appraisal of your own abilities in terms of governance and investment knowledge, and decide if you are realistically able to take the responsibility yourself as a trustee board or committee, or whether by delegating to consultants or banks you will have an edge that puts you in the minority of winners.

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