Investment Consultants Market Investigation. Provisional Decision report
Overview of our provisional decision
Investment consultancy and fiduciary management services influence the pension outcomes for millions of people. It is vital that competition within these markets works well.
Both investment consultancy and fiduciary management are useful services for many pension schemes, helping them to manage their investments well on behalf of scheme members.
We have provisionally found that there is an adverse effect on competition and that material customer detriment may be expected to result from it in both the investment consultancy and the fiduciary management markets. We have greater concerns about the fiduciary management market due to the features we have found.
In investment consultancy, there is a low level of engagement by some customers in choosing and monitoring their provider. It is also difficult for them to access and assess the information needed to evaluate the quality of their existing investment consultant and to identify if they would be better off using an alternative provider. This reduces their ability to drive competition and reduces providers’ incentives to compete. In turn, this may be expected to result in material customer detriment in the investment consultancy market.
In fiduciary management, firms which provide both investment consultancy and fiduciary management have an incumbency advantage, deriving from low customer engagement at the point of first moving into the service, investment consultants steering their advisory customers towards their own fiduciary management service and the fact that prospective customers do not have access to comparable information on providers’ historic performance, or clarity on their fees. This means that some customers remain with their investment consultant even if a better deal on fiduciary management is available elsewhere. This problem may be exacerbated by the relatively high costs of switching provider.
In addition, it is difficult for many customers to access and assess the information they need on the fees of their existing fiduciary manager and to identify if they would be better off using an alternative provider.
Overall, these features reduce customers’ ability to drive competition between fiduciary managers and reduce providers’ incentives to compete. In turn, this may be expected to result in material customer detriment in the fiduciary management market.
Our proposals aim to remedy these problems in an effective and proportionate way. They include the following:
• The introduction of mandatory tendering when pension trustees first purchase fiduciary management services and a requirement to run a competitive tender within five years if the existing fiduciary mandate was awarded without a competitive tender.
• Greater support for running tenders from The Pensions Regulator for investment consultancy and fiduciary management customers.
• A requirement on investment consultancy and fiduciary management firms to report investment performance to their customers using a set of common standards.
• A requirement on fiduciary management firms to disaggregate fees for prospective customers and provide greater clarity to existing customers on costs, including those relating to exiting the service.
• A requirement on pension trustees to set objectives when they hire an investment consultant, in order to be able to judge quality of the service.
In order to reinforce some of these remedies, we recommend that the government extend the FCA’s regulatory perimeter to include the main activities of investment consultancy and fiduciary management providers.
Read the complete report here