Is Your Consultant Breaking the Law? | Chief Investment Officer

Investment consultants recommending themselves to manage their clients’ assets could be breaking US federal pension law, according to a letter circulated by the country’s Labor Department.

The document, uncovered by the Wall Street Journal, showed an insight into the department’s thinking, which could result in new laws to control how advisers interact with their pension clients.

The letter’s author, Assistant Secretary of Labor Phyllis Borzi, oversees the Employee Benefits Security Administration and has been deeply involved in the relationship between investors and their advisers—both institutional and retail—since taking up the post.

Her 24 September letter centres on whether a consultant is classed as a fiduciary when giving advice to its pension client. The issue of whether these service providers should put their clients’ interests above their own has been a contentious one for some time. In 2010, the Department of Labor proposed such a requirement, but the move was dropped after an outcry the financial sector.

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The recipient of the most recent letter, Democratic Congressman George Miller, himself raised the question of conflicts of interest in the market in June.

He called on the Department of Labor to look into the practice as it created new governing rules on the role of advisers.

Within the industry itself—on both sides of the Atlantic—there have been growing tensions on the matter as the number of assets managed by so-called “outsourced” or “delegated” providers has increased.

Large investment consultants have, in some circumstances, evolved to offer a wide range of money management products to their clients. According to its website, Towers Watson is “responsible for over US$55 billion of delegated and fiduciary assets worldwide”.

About 80% of UK pension funds planning to take on a fiduciary or outsourced manager employed investment consultants such as Aon Hewitt, Mercer, or Towers Watson, according to a market survey last year by accounting firm KPMG.

Anecdotal evidence provided to CIO suggests some consultants have refused to work with clients on anything other than a fiduciary management basis. Many consultants appointed to a fiduciary role are the incumbent investment consultant, which develops the existing contract with its client.

In the US, there have been several incidents highlighting the confusion—and tensions—within the outsourced market. JP Morgan has been sued by an outsourced CIO (OCIO) client for making, what the client felt to be “clearly unsuitable investments”. The bank-owned asset manager responded that it had full control over the portfolio at the time and requested that the lawsuit be thrown out of court.

Earlier this month, the board of the San Diego County EmployeesRetirement Association voted—by one—to retain the services of OCIO Salient Partners, an investment manager that also employs other a third-parties to manage its clients’ money.

Several board members had been unhappy with the company’s investment decisions and pay structure—despite it being approved at the outset of the relationship—but the majority agreed to renew the company’s contract to run the $10 billion fund’s assets.

The Department of Labor declined to offer further comment on the letter to the WSJ and were unavailable for comment at CIO press time.

Asset managers can look forward to a bump in bonuses and base salaries this year based largely on performance, according to consulting firm Greenwich Associates.

Based on a survey of more than 1,000 financial professionals, the firm projected a 5% to 10% increase in incentive compensation and a 3% to 5% raise in base salary for 2014. These estimates would put buy-side bonuses just 6% below 2007’s peak.

Furthermore, the report said equity managers are expected to out-earn their fixed income counterparts, thanks to the bull market and strong investment performance.

The firm calculated senior equity managers at an investment firm or mutual fund would make about $570,000 for 2014, compared to their fixed income manager peers’ $350,000. These figures are also slightly higher than last year’s, which remained at $530,000 and $340,000 respectively.

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“These ongoing positive trends are making asset management more appealing as a career choice for financial professionals, relative to a sell side that is still plagued by reduced compensation on results, intense regulation, and somewhat diminished social status,” the firm said.

greenwich compensation

Greenwich Associates said bonuses at investment and commercial banks were far from reaching the pre-crisis high, as they still lagged behind by more than 40%.

“The buy side looks particularly welcoming relative to a banking industry that still has not recovered fully from the global financial crisis,” the firms said. “By nearly every metric, the sell side is not what it once was as an employer.”

However, it’s not all good news for the buy side.

While hedge funds pay their managers almost twice as much as traditional asset managers, their incentive compensation trails the pre-crisis peak by 35%, the firm said. Managers’ bonuses are also likely to flatten this year, largely due to disappointing performance, with both increases and decreases ranging from -5% to 5%.

“At the very least, [strong performing hedge funds] will be able to maintain incentive compensation at current levels,” the firm said. “Meanwhile, increasingly selective investors will continue to spurn funds that fail to deliver performance, and employees of these funds will see compensation continue to stagnate and even decline.”