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A dark cloud is hanging over transition management, one that has evolved from an angry storm cloud a year ago to a dank, depressing dampness that refuses to move—and is making life miserable.
A year ago the sector was in turmoil as two of the largest providers stood accused of overcharging their clients.
State Street, transition management’s Boston Grande Dame, admitted it had overcharged several high-profile European pension funds—the UK’s Royal Mail, major grocery chain Sainsbury’s, and the Irish Government. The episode would see heads roll and fees refunded. It is widely believed that the UK’s Financial Services Authority (FSA) is about to publish a review on the matter, but the regulator will neither confirm nor deny it as of November 9.
A few months after the State Street revelation, BNY Mellon affiliate Convergex was accused of trading on a basis that would earn fees on either side of the deal, rather than working for the clients’ best (financial) interest. The company denied any wrongdoing, but the US Department of Justice has been looking into the matter.
Combined with seemingly ever-present court cases about overcharging investors over FX transactions, it is safe to say that this sector has experienced some negative press. Investors who spoke to aiCIO in the immediate aftermath were asking their consultants to make sure they had not been affected.
And then? Nothing—just an uncomfortable silence.
Chris Adolph, head of transition management in EMEA for Russell Investments, told aiCIO that clients were paying attention to providers’ actions, but he was surprised there had not been more of a furor made about the high-profile cases.
“I wonder if some are waiting for the reports that are due out from the various regulatory bodies,” said the London-based Adolph. “In any other industry there would have been an uproar. Pensions are a very sensitive issue, and on the whole the press have not been vocal in this area.”
The apathy is getting some people down.
“There has been little progress,” said Andrew Williams, principal at the Mercer Sentinel Group. “We have not seen other firms reacting or making changes. Nor have we seen any real change from clients. Some of them are sticking with the providers that have been in the news for the wrong reasons.”
The head of one large transition management team exclaimed in frustration to aiCIO that his firm was still losing business to these companies.
“There is a lot of inertia in transition management—we try to get clients to test the market, but increasingly it is the incumbent that is used,” Williams added. “There was an uptick in clients looking beyond their existing provider 12 months ago, but that has faded away. Surveys show consultants are not often used in the selection process, but we continue to see value in a competitive tender process.”
Did transition management waste a good crisis?
“Once the regulatory authorities have reported, attitudes will probably change—but compliance is not the only answer,” said Adolph. “Compliance doesn’t change the culture, it just pushes the problem somewhere else.” He cited the issue of pre-hedging that was rife 10 years ago. “It’s better perhaps to engage with a manager whose underlying business model and culture is not at odds with those of its clients.”
It seems inertia is the name of the game in transition management. A report this month from Ross McLellan, whose departure from State Street swiftly followed the overcharging scandal, claimed the industry and its practices had not changed in 15 years.
McLellan claimed there was still no uniform, independent reporting or performance measurement, nor a clear way to see what charges and costs clients had paid. (Ironically, all of this might have prevented State Street’s troubles a year ago—and saved McLellan his job.)
Adolph at Russell—the only transition manager who has made a five-year rolling track record generally available to clients and the UK consulting community through consulting firm Inalytics—said the industry should be proactive in its approach to transparency and post-transition reporting.
Citi’s head of transition management in EMEA, Steven Dalzell, told aiCIO that change was needed. “We agree with recent calls to update pre-trade templates, for example, but the document most in need of rejuvenation is the T-Charter.”
That document was created by a panel of (most of the) global transition managers that were around in the mid-2000s. It is guidance and criteria for clients and providers to follow.
“The T-Charter did a great job in its day, but it needs updating,” said Dalzell. “It doesn’t go far enough and needs more detail explaining the various execution styles, venues, and any potential conflicts. Clients need to be sure they understand the lifecycle of their trades to fully understand how and where each transition manager is executing their orders.”
It must be noted that Dalzell was more upbeat than many about the current state of the industry. However he added: “We need to resurrect the reputation of transition management; we cannot allow a couple of organization-specific issues to cloud the entire industry. We are here to save clients money and make portfolio change more efficient.”
Don’t reach for the sunglasses just yet, though. Williams at Mercer was not so easily cheered: “Volumes seem to be down across the sector, and pension funds don’t always need transition managers to move into new types of alternative assets. There is not much to be cheerful about.”