Fiduciary Management Vs Implemented Consulting. SEI debates the Pros and Cons of the pooled fund and segregated account approaches

Transcription

1 Fiduciary Management Vs Implemented Consulting SEI debates the Pros and Cons of the pooled fund and segregated account approaches Over the last year Fiduciary Management and its sister approach, Implemented Consulting, have grown in popularity as an alternative to the traditional pension fund management model. Many pension funds may be faced with confusion over how these two different but related approaches can be compared and assessed. In this paper we will seek to define each approach and identify and clarify the potential differences comparing the benefits of each approach. Fiduciary Management vs Implemented Consulting What is the difference? Both Fiduciary Management and Implemented Consulting share the premise that delegating some Trustee governance functions may be advantageous for pension fund Trustee boards. In practice this means that one company, the Fiduciary Manager or Implemented Consultant, is responsible for providing risk management, investment advice, implementation and oversight of the pension fund s investments. This differs from the traditional model of pension fund governance in the UK where the pension fund Trustee body is responsible for managing and engaging multiple advisers and asset managers providing different and often unrelated advice. The key area of differentiation between Fiduciary Management and Implemented Consulting lies in the area of investment implementation and the extent to which Trustees are able to delegate their responsibilities for manager selection and replacement. In the Fiduciary Management model Trustees are able to fully delegate responsibility for manager selection, monitoring and replacement. SEI believes the most efficient approach to delivering this delegation model is through the use of a pooled fund structure. The Trustees contract with only one company, the Fiduciary Manager, and the pension fund assets are invested in pooled fund structures with underlying portfolios of multiple asset managers for each asset class. In this model, accountability for the individual asset manager relationships and their performance clearly rests with the Fiduciary Manager. In the Implemented Consulting model Trustees do not typically fully delegate their accountability for manager selection. Whilst the Implemented Consultant will identify and recommend specific managers / implementations, the relationship between the Trustees and the asset managers is typically on a segregated basis meaning that the Trustees will continue to contract with each asset manager individually and will therefore retain legal accountability for the relationship and each selected asset manager s performance. While there are exceptions to this type of process, by and large it is the most prevalent in the Implemented Consulting industry.

2 Given the perhaps subtle differences between the two approaches, we thought it would be helpful to open the discussion on the pro s and cons of each. I. Delegation/Control By its very nature the pooled fund structure of Fiduciary Management leads to full delegation of the manager selection/deselection decision. This full delegation may be associated with a sense of loss of control by the Trustee board. On the other hand it can allow the Trustees to focus their time and resources on the strategic scheme decisions, therefore arguably providing enhanced control over the most important contributors to overall plan success. In the Implemented Consulting Model utilising a segregated fund approach, the Trustee body may retain the final decision on manager selection/de-selection. While the Implemented Consultant may recommend a particular manager / course of action, ultimately the Trustees retain the final decision. Trustee bodies may associate this partial delegation with retaining some control over the implementation process. II. Fees and Costs The pooled fund structure of the Fiduciary Management approach offers the benefit of realising economies of scale both when negotiating fees with asset managers and when covering transaction and administration costs which can be shared between all members of the pool. This is in contrast to a segregated approach where negotiation on fees with asset managers can be significantly more difficult due to the relatively low buying power of individual pension funds. In this model, unlike in a pooled fund structure, the pension fund is responsible for negotiating fees directly with the asset manager on an individual basis and is exclusively responsible for any transaction or administration costs incurred. III. Administrative Burden and Speed of Implementation Contract negotiations can take significant time and legal resources. When using the pooled fund structure offered by Fiduciary Management this is limited to one contract between the Trustees and the Fiduciary Manager. This will require time and focus but only occurs once. In the event of a manager change the Fiduciary Manager takes responsibility for contracting with the managers, with a focus on leveraging administrative and contractual experience and minimising the associated time and cost. In the case of a segregated fund approach offered by Implemented Consultants individual contracts with the pension fund are required for each asset manager. This can be a significant burden for Trustees and, although assistance can be provided by the Implemented Consultant, ultimately the contract is required to be between each individual asset manager and the Pension Fund. Each time a manager is changed contract and fee negotiations will occur leading to potentially significant implementation time and incurring cost for the Pension Fund. IV. Fiduciary Obligations and Accountability In a Fiduciary Management approach, utilising pooled funds, responsibility for manager selection, oversight and replacement is clearly delegated to the Fiduciary Manager. This means that the Fiduciary Manager is accountable for the decisions made and can be held legally responsible for any issues with the asset managers. In addition, because the pooled fund approach necessitates a fee structure based on

3 assets under management, the goals of the Fiduciary Manager are directly aligned with the pension fund increasing accountability. In the segregated model typically offered by Implemented Consultants, accountability is less clear. If the Trustees have contracted directly with each asset manager then they remain accountable for the asset manager s performance. As such, measurement of the Implemented Consultant s success may become difficult; particularly to the extent the Trustee board does not follow all recommendations. In addition because fees will be paid independently to multiple parties, the individual asset managers and the Implemented Consultant, goals are likely to be less aligned leading to reduced accountability for performance against goals. V. Oversight and Transparency A key benefit of a Fiduciary Management approach utilising pooled funds is the ability to take a full view of the pension fund at any time. This offers complete transparency on a daily basis to the Fiduciary Manager for enhanced risk management. This approach also facilitates simple and consolidated reporting available soon after month end. This may be difficult to replicate by the segregated approach usually offered by Implemented Consultants because of the complexity of gathering information from multiple individual asset managers. The approach can lead to difficulties in consolidating and standardising reporting and risk management oversight; and provides limited ability to see a full view of the total pension fund at any given time. Conclusion Over the last few years the turbulent market environment combined with increasing legislation and complexity of investment products has placed an increasing burden on pension fund Trustees. Both the Fiduciary Management and Implemented Consulting approaches can help alleviate this burden offering a more effective governance model. As this paper has shown, the underlying philosophy of these two models, in combining advice and implementation, is similar but the methods of implementation can differ. Pension Funds should be encouraged to compare these two models when considering the replacement of the traditional model with this new innovative approach to pension fund management. Fig 1: An overview of the difference between the approaches Responsibility Fiduciary Management via the Pooled Fund Approach Implemented Consulting via Segregated Account Approach Delegation of Manager Selection/ De-selection Asset Management Fees Advisory Fee Contracts Accountability Reporting Full delegation Negotiated by Fiduciary Manager/Economies of Scale One asset management fee. No extra fee for advice Trustees have only one with Fiduciary Manager Fiduciary Manager is accountable for performance of asset managers within portfolio Consolidated and full view of pension fund holdings at any time Final decision remains with Trustees Negotiated with individual asset managers by Trustees. No Economies of Scale Fees for individual asset managers + advisory fee Trustees have multiple with individual asset managers Implemented consultant offers no accountability for asset manager performance Difficult to consolidate information from multiple asset managers

4 Important Information Discussion of fees and costs does not necessarily apply to those that would be experienced by an investor in the pension fund. A pooled fund structure is where multiple investors contribute assets which are held jointly as a group. SEI Investments Company is a (U.S.A.) public company that is the ultimate parent entity of the SEI corporate group of consolidated companies, wholly-owned subsidiaries and majority owned business entities. For the potential future delivery of services, we have listed below the relevant subsidiaries - and their purpose - for your clarification. SEI Investments (Europe) Limited is an investment manager as abovedescribed. SEI Investments Global, Limited is the Manager of the SEI Global Master Fund Complex and is authorised by the Irish Regulator to provide investment management services to the UCITS Fund and its sub-funds. SEI Investments Management Corporation, is a (U.S.A.) federally registered investment advisor appointed as the investment adviser to the UCITS Funds. Past performance is not a guarantee of future performance. Investment in the range of SEI s Funds is intended as a long-term investment. The value of an investment and any income from it can go down as well as up. Investors may not get back the original amount invested. Additionally, this investment may not be suitable for everyone. If you should have any doubt whether it is suitable for you, you should obtain expert advice. No offer of any security is made hereby. Recipients of this information who intend to apply for shares in any SEI Fund are reminded that any such application may be made solely on the basis of the information contained in the Prospectus. This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the funds or any stock in particular, nor should it be construed as a recommendation to purchase or sell a security, including futures contracts. If the investment is withdrawn in the early years it may not return the full amount invested. In addition to the normal risks associated with equity investing, international investments may involve risk of capital loss from unfavourable fluctuation in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations. Narrowly focused investments and smaller companies typically exhibit higher volatility. Products of companies in which technology funds invest may be subject to severe competition and rapid obsolescence. SEI Funds may use derivative instruments such as futures, forwards, options, swaps, contracts for differences, credit derivatives, caps, floors and currency forward contracts. These instruments may be used for hedging purposes and/or investment purposes. While considerable care has been taken to ensure the information contained within this document is accurate and up-to-date, no warranty is given as to the accuracy or completeness of any information and no liability is accepted for any errors or omissions in such information or any action taken on the basis of this information. This information is approved, issued and distributed by SEI Investments (Europe) Limited, 4th Floor, Time & Life Building, 1 Bruton Street, London W1J 6TL which is

5 authorised and regulated by the Financial Services Authority. Please refer to our latest Full Prospectus (which includes information in relation to the use of derivatives and the risks associated with the use of derivative instruments), Simplified Prospectus and latest Annual or Interim Short Reports for more information on our funds. This information can be obtained by contacting your Financial Advisor or using the contact details shown above.