28 June 2017
There is currently much debate over how investment consultants measure their success, not least arising from the FCA’s Asset Management Market Study released today. The debate raises issues around using portfolio performance measures, manager selection measures, or a range of other metrics to determine whether clients have received good advice.
Increased regulation is inevitable, and will hopefully lead to better outcomes and protections for the end investor. However, there is a danger that the establishment of a uniform and quantitative measure of success for all pension schemes and their advisers will be somewhat arbitrary and lead to problems.
Too often “what gets measured gets done” – and the standard of measurement itself could cause the nature of the advice to change. For example if investment consultants are measured on the absolute performance of the assets, they might be reluctant to recommend lower risk (or ‘hedging’) strategies. These lower risk strategies might be entirely appropriate for a particular pension scheme given the circumstances and strength of the sponsoring employer, but may look less attractive from a pure investment return perspective. Contrast this with a scheme where greater risk-taking may be necessary and appropriate, but could be advised against this approach if its consultant is measured against a standard risk metric.
There are a number of other hurdles for any quantitative measure of “success”:
- What timeframe is used – pension schemes are long-term investors and encouraging greater focus on short-term goals could lead to poor investment decisions.
- Investments are only one part of the puzzle – for pension schemes, the regulator’s more recent focus on Integrated Risk Management highlights the difficulty of measuring the investment advice in isolation. Certain strategies that might seek to maximise return, or minimise risk, or exhibit the lowest correlation to equities, might not be appropriate given the scheme’s covenant or funding position.
- Strategy may differ from advice – pension fund trustees can (and do) have different views to my own. My role is to help them clarify their needs and objectives, and weigh these against different investment strategies. I will offer my view as their advisor and give clear recommendations, but the ultimate decision rests with them. And rightly so, as it involves balancing a wide range of considerations, not all of which are investment-related. As such, relative performance may not be fully attributable to the adviser (good or bad!). More views from my colleagues on this issue are discussed in this blog.
- Encouraging “group-think” – If you make any single quantitative metric the measure of success, then consultants may be incentivised to provide similar advice to clients irrespective of their circumstances, leading schemes to increasingly adopt the same strategy and lowering the quality of advice.
For those offering standardised, off-the-shelf products, quantitative measurement criteria can make sense. However, I don’t believe for one moment that investment consultants should provide a standardised, off-the-shelf service to their clients.
That is certainly not what we at LCP believe our role to be. In my experience, the circumstances clients find themselves differ hugely, so their strategies and outcomes should differ as well. In addition to improving transparency and competition, any framework for measuring performance must be suitably flexible to stay relevant in a complex and varied environment.
Read our response to the FCA’s Asset Management Market Study - click here