Confusion Reigns over Outsourcing/Fiduciary Management

(June 11, 2012)  —  Pension funds are torn between the benefits brought by outsourcing their investment powers and relinquishing this level of control, research in the United Kingdom has found.

Over two thirds of pension fund investors said the perceived reduction in control over portfolio decisions was a barrier to them using a fiduciary manager or other providers of delegated services.

Conversely, some 97% said the speed of decision-making and execution that these types of service brought to their investments were advantages of working with these providers. Investors were responding to a survey conducted by Russell Investments, which offers these services.

Russell said there was “a rift between the perception of fiduciary management and the reality of the benefits it brings, as recognised by investors using the approach”.

In February, a survey by aiCIO  found only half of all investors who outsourced investment decisions to a third party manager were very happy with the service and performance they received.

Additionally, investors were confused with the level of control they should be giving over to a third party contracted for this service. Some said they had relinquished full control, right down to investment firm selection, whereas others said they merely took advice.

One point highlighted by Russell was the reluctance by many pension funds to take independent advice on the selection, appointment and on-going performance of fiduciary managers or other providers of this service.

Some 26% of respondents said they disagreed that an independent third party should be involved in the initial decision or monitoring of the service.

Heath Mottram, Head of Fiduciary Management at Russell, said: “I’m slightly surprised that as many as a quarter of those we asked wouldn’t automatically seek independent support when making such a significant decision. Selecting a fiduciary manager is an important decision – and one which requires thought and due process. There are many differences between what different providers in this space offer and the appointment of an independent third party when selecting and monitoring the performance of a fiduciary manager would be a sensible step to take for many.”

There has been concern from some in the asset management industry than pension funds are being offered the chance to ‘upgrade’ from their existing investment consulting package to a complete ‘outsourced’ solution without the incumbent provider going through the usual tendering process.