Lombard: FCA questions age of pension consultants’ costly rope

For a nation that generally despises unaccountable high earners of dubious worth — think estate agents, car dealers, management consultants, Brussels bureaucrats, crisis-era bankers, opinion pollsters, post-crisis-era bankers, newspaper columnists . . . actually, that reminds me, aren’t I due a pay rise? Sorry, got a bit sidetracked there. Where was I? Oh, yes: For a nation that generally despises unaccountable high earners of dubious worth, the UK has taken a very long time to go after investment consultants.

For years, the likes of Mercer, Aon Hewitt and Willis Towers Watson have been able to charge millions of pounds in fees for telling nervous pension trustees which fund managers they won’t be blamed for using — to no obvious benefit to anyone, apart from the consultants’ local estate agents and car dealers.

Trustees have lacked the experience or bargaining power to do without them. And fund managers have needed the business enough to indulge them. In corporate hospitality suites from NW8 (Lord’s) to SW19 (Wimbledon). In the meantime, the consultants have built a business advising on £1.6tn of investment mandates, reckons KPMG, and billing accordingly.

But it seems the regulator has had enough of this sub-sector of the old rope industry. As a part of its asset management review, the Financial Conduct Authority has proposed that unregulated consultants come under its control at last. Given the findings in the FCA’s report, it is easy to see why. Investment consultants would appear to share too many characteristics with less lauded professions.

1) Taking money for nothing. FCA analysts found consultants had no obvious ability to identify top-performing fund managers. In fact, the funds they recommended failed to achieve outperformance “significantly different from zero”. But the consultants’ fee structure — a retainer plus fees for manager selection — encouraged “churn”. In some cases, fund selection fees were kept high by presenting confused pension trustees with “spurious choice”.

2) Failing to limit costs. Consultants did not use their clout with fund managers to push down fees for pension clients — management charges stayed the same from 2006 to 2015.

3) Ignoring conflicts of interest: many consultants advised pension trustees on external management while promoting their own version of the same services — which did not exactly promote competition.

4) Wielding power without responsibility: in an irony not lost on the regulator, trustees outsourced decisions to consultants because they feared they would be liable if things went wrong — but the unregulated consultants have no individual accountability. Despite this, their recommendations drive fund flows.

So what did the consultants do when accused of getting away with all this? They tried to get away with it — by promising better disclosure of charges. But, unlike pension trustees, the FCA isn’t buying it. For some consultants, it might be time for a career change.

matthew.vincent@ft.com

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Today’s other Lombard note:
Dixons Carphone switches on to service

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