“You might want to put two diversified growth funds (DGFs) together, but [with lifestyle] if one goes off the boil and you want to change it, you have to write to all the members and get them to make decisions,” he says. “But if you make a ‘Joe Bloggs pension scheme fund’ you can change the underlying manager without much communication, provided it’s the same kind of manager.”
Finch believes the three retirement streams now available to members and the switching of managers and assets required, will lead to the growth of TDFs, which, he says, fiduciary managers are “ideally placed” to manage.
Advocates also believe a fiduciary approach in DC can harness economies of scale and grant access to more complex asset classes and strategies not usually the preserve of DC.
As P-Solve managing director, DC assets solutions, Britt Hoffmann-Jones explains, her firm’s approach attempts to better align DB and DC strategies using exchange traded funds (ETFs) and direct investments to keep cost down with the charge cap in mind, be more specific in terms of investment views and create more investment opportunities (see box-out below).
“If you buy gilts directly, it is cheaper than going into a fund as you cut out the middle man,” she says. “We can decide to buy 10-year gilts rather than a pooled fund with 10-year gilts in and an ETF gives a wider opportunity set as the type of things you can invest in is much wider than typically available for insurance platforms.”
The merits of fiduciary management are often tempered by allegations of conflicts of interest between offering impartial advice and managing a client’s money. This has been well-documented in DB, but what about DC?
JLT’s Finch believes there are conflicts of interest in everything, but how they are managed is critical. He notes even through a traditional consulting approach a client uses a consultant’s buy-list of managers; so on one level there is no difference between the two.
He says: “Fiduciary management can be seen as a solution, but you need to work through the problem with the client then work through the solution. Don’t go instantly to the fiduciary solution.”
Hoffmann-Jones agrees any relationship has potential for conflicts. “As an investment adviser one might go to a client and say ‘I think it is worth reviewing the global equity manager and there is a £25,000 fee for that’,” she says. “There is a conflict there just as much as running the asset allocation on behalf of clients and getting a fee.”
Late last year following an extensive review, consultant Redington publicly announced it would not pursue the fiduciary path for its book of DB clients. In terms of DC, it believes trustees can obtain an adequate degree of outsourcing by using DGFs, while still retaining an independent relationship with their consultant. Redington director, investment consulting, Patrick O’Sullivan’s advice for trustees is to compare and contrast a fiduciary approach with a DGF.
He says: “[In DC] you can’t really tailor the outcome to the individual, so in that context fiduciary management in DC seems to be competing against what you can get within a DGF. We would struggle to see the value proposition of consultant fiduciary management versus what you can get from one of the leading DGFs.”
Despite differing opinions, all parties agree being transparent with clients up front about roles and responsibilities is crucial, as is defining what success and failure looks like once it is in place.
BOX-OUT: HOW P-SOLVE USED EXCHANGE TRADED FUNDS IN ITS FIDUCIARY APPROACH TO REDUCE DC MEMBER CHARGES
In 2014 P-Solve increased its exposure to emerging market equity within its DC fiduciary mandates in order to take advantage of more attractive valuations.
To minimise costs, it invested in the Vanguard Emerging Market Exchange Traded Fund (ETF) with total ongoing management costs of 0.16% per annum. This compared with the ongoing management costs of 0.25% per annum for the more traditional passive pooled fund available to P-Solve at the time.
Trading costs on the ETF were also lower than the pooled fund (estimated at 0.04% versus 0.35% on either purchase or sale), allowing it to save not just on ongoing management costs, but also on any future transaction costs.
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