Scheme sponsor and actuaries expected to challenge investment consultants, CMA finds

Almost half of investment consultancy clients state that the scheme sponsor is “very important” in questioning their investment consultant, the Competition and Markets Authority has found.

According to the CMA’s Investment Consultants Market Investigation - working paper on trustee engagement, 49 per cent of respondents think that the scheme sponsor is very important in scrutinising and challenging their investment consultant, while 42 per cent also stated that the scheme actuary is very important in doing so also.

The CMA assessed trustee engagement on four indicators including: switching, tendering and/or switching, undertaking a formal review of fees and/or quality, and undertaking an external review of fees and/or quality.

The consultative working paper indicated that defined contribution schemes appear to be considerably less engaged than average. For example, the rate of switching for DC schemes among investment consultancy clients is 16 per cent in comparison to an average of 27 per cent. Furthermore, the rate of switching or tendering is 29 per cent, compared to an average of 41 per cent.

The CMA noted that the size of the scheme can also be an indicator of engagement. Smaller schemes are less likely than average to have undertaken a formal review of fees and/or quality, while large schemes are significantly more likely than average.

In addition, large schemes are also more likely than average to have undertaken at least one of the four indicators assessed by the CMA.

Comparing the four indicators of engagement in investment consultancy and fiduciary management, the CMA’s survey found that levels of engagement are lower for fiduciary management on each indicator.

Between the two, the CMA noted that the time and cost of switching provider is generally much greater in fiduciary management than investment consultancy. While fiduciary management switching could take a number of months and costs in the range of 0.1 per cent to 0.5 per cent of AUM, it is understood that the upfront cost and timing for switching investment consultancy services are minimal. However, these can vary dependent on the client, it added.

Moreover, the body also found evidence that schemes with an investment sub-committee are more engaged than average. These schemes are more likely than average to have undertaken a formal review of fees and/or quality and at least one of the four indicators.

Nonetheless, the paper notes that it is “difficult to draw conclusions” from its results as fiduciary management is still a relatively new and emerging service. As many schemes have only recently invested in fiduciary management, it expects that measures of engagement like tendering or switching will be lower.

The CMA concluded: “We acknowledge that switching and tendering rates are not the only measures of engagement, and that low switching rates are not necessarily indicative of low engagement.

“In addition to these ‘headline’ indicators of engagement, we have therefore also considered broader measures of engagement such as whether trustees are able to scrutinise and challenge the investment advice they receive, and the role played by other stakeholders such as the scheme sponsor.”

The CMA has welcomed addition evidence and views on its analysis in the working paper.

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