Watchdog cracks down on investment consultants

Watchdog cracks down on investment consultants

The competition watchdog has proposed a series of sweeping changes to how pension trustees oversee and invest their funds.

The Competition & Markets Authority (CMA) investigated the investment consultant market after the Financial Conduct Authority had asked it to do so.

Investment consultants advise pension trustees on how to invest their funds. Some pension trustees delegate investment decisions to fiduciary managers and a number of firms offer both services.

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The CMA found there were features of this market which had led to incumbency advantage which prevents, restricts and distorts competition, meaning trustees continue using an investment consultancy for fiduciary management even if a better deal is available elsewhere.

It also found investment consultants which offer fiduciary management services had an advantage when it came to getting business from existing clients, as they were able to steer customers towards their own services.

The investigation also found many pension trustees did not have sufficient information on the fees or quality of investment consultancy and fiduciary management to be able to judge if they were getting a good deal from their existing provider, or if they could do better elsewhere.

John Wotton, chairman of the CMA’s investment consultants market investigation, said: "This is an extremely important sector that influences how well millions of people’s pension savings are invested, yet we’ve found that many pension trustees may not be getting the best value for money for their members.

"Some lack the information they need to compare providers and so could be sticking with their existing investment consultant or fiduciary manager when there are better options available.

"It’s therefore imperative we make these changes so that the sector works better for those it is meant to support – pension scheme members."

To address these issues, the CMA has proposed that pension trustees who wish to delegate investment decisions for more than 20 per cent of their scheme assets to a fiduciary manager must run a competitive tender with at least three firms.

Fiduciary management firms must provide potential clients with clear information on their fees and use a standard approach to show how they have performed for other clients, so that pension trustees have the information they need to compare different providers.

The CMA also recommends that the government broadens the regulatory scope of both the FCA and The Pensions Regulator to ensure greater oversight of this sector.

It also proposed restrictions on how investment consultancy firms market their services.

Pensions consultancy XPS Pensions said it supported the remedies.

Patrick McCoy, head of investment at XPS Pensions Group, said: "The remedies will have significant consequences for the fiduciary management market which has been dominated by the Big 3.  

"In the investment consulting industry, the CMA found that ‘below average’ quality firms have substantially higher market shares. So increased competition in both markets will provide better outcomes for pension funds."