One step forward equals two steps back.
While our colleague Terry Dunne argues in nearby pages that there’s much to learn from Britain’s 401(k)-like defined contribution system, there are issues to definitely avoid. It seems asset managers are submitting back-tested performance data as the numbers of a real fund, as well as confusing performance data as to whether the numbers are net or gross of fees.
Calling the problem “dressing up” track records by fund managers, research and consulting firm Cerulli Associates says that even larger fund managers are “guilty of putting a gloss on achievements.”
That’s not all. Other issues of concern include: sweeping a poorly performing product under the carpet either by changing its name or its mandate; aggregated assets of a manager or a product including segregated mandates that the consultant cannot verify; data being changed without explanation between pitch and proposal; and managers launching or adapting products based primarily on market demand.
“The last example can be particularly frustrating for asset managers,” says Tony Griffiths, a senior analyst at Cerulli, adding it’s not all their fault. “Many firms feel that investment consultants set moving targets. Managers are expected to build products and services based on personal convictions, while at the same time addressing the needs of the consultant; the suggestion being that products can be tweaked, but not tailored–a potentially impossible balancing act.”
In Europe, particularly in the U.K., investment consultants are the gatekeepers to a large number of corporate and public pensions, as well some insurers. According to an estimate in Cerulli’s upcoming 2016 European Institutional Dynamics report, the size of the European institutional investor market stands at more than $18.4 trillion. The five largest investment consultants globally advise on approximately $4.7 trillion, one quarter of the European total.
Cerulli says it does not see the long-running prickly relationship between investment consultant and manager easing anytime soon, especially in the U.K. where demand for consultant-led fiduciary management services continues to grow and yet fiduciary management performance data is not widely available.
Issues arising from fiduciary management are being reviewed by the U.K. financial regulator, with the interim results due to be published in mid-2016.
“Cerulli expects the FCA to move toward levelling the playing field, raising the bar for all fiduciary and asset management providers. Not that fund managers will find respite among the UK’s advice-only regional consultants,” says Griffiths.
Other Findings:
- The expected backlash against the second layer of fees investors in the U.K. pay to gain access to funds of funds has not transpired, noting that favorable cost competitiveness against discretionary management services is a key reason for the continued support.
- Net asset value ultimately determines whether a manager is performing well enough in the eyes of an institution, but, displaying the necessary expertise when it comes to selection is not as straightforward. However, there are ways that managers can improve their chances of winning and retaining favor.
Analysis reveals that independent and bank-owned managers achieved almost identical returns last year. In an article on the controversial debate of in-house versus external, Cerulli notes that only one major bank has been punished for inappropriately favoring its own funds.
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
