How could fiduciary management help your scheme?

Thanks so much for taking the time to speak with me today, Charles. I wonder if we could start with the basics. What is fiduciary management, and how does it differ from working with an investment consultant?

A fiduciary manager provides investment advice and takes responsibility for implementing a scheme’s day-to-day asset management. Traditional investment consultancy is an advisory model, with implementation remaining the responsibility of the trustees.

Fiduciary management is somewhat similar to traditional investment consultancy, insofar as the trustees are ultimately in charge of the overall investment strategy. Where it differs is that fiduciary managers both advise on and implement their scheme’s investment strategy on a day-to-day basis.

By delegating to a fiduciary manager, trustees can expect to benefit from economies of scale, and increased diversification across a range of asset classes, investment managers and strategies, which they may not be able to access or oversee independently. To use an analogy, a fiduciary manager acts like the executive function at a company, leaving the trustees to behave more like the board of directors. Ultimately, the trustees are in control, without having to deal with day-to-day tasks.

That idea of delegation is something I want to push you on. Does the trustee lose control in delegating to a fiduciary manager? How will they know what the manager is investing in on their behalf?

No, as mentioned, fiduciary management is similar to investment consultancy in that respect: the trustees are ultimately in charge of the overall investment strategy, and they decide which activities to delegate. Trustees can and should challenge their fiduciary manager; quarterly meetings are the ideal forum for this.

The trustees will know which investments are being used through regular reporting and some, but not all, fiduciary managers allow trustees to veto certain investments (e.g. illiquids, certain asset classes).

Okay, so the trustees set the parameters within which the fiduciary manager must operate? By being one step removed, is fiduciary management not more risky for the scheme?

On a day-to-day basis, a fiduciary manager has oversight of the investment strategy and the managers within the strategy. This enables the fiduciary manager to take advantage of timely opportunities to reposition, or de-risk and lock-in gains. Delays could mean a scheme misses out on such opportunities. Fiduciary management presents a lower risk option, compared to the traditional model of investment consultancy, in this respect.

The trustees set the parameters within which the fiduciary manager must operate, and it should be noted that some fiduciary managers are more flexible than others. This is something the trustees must consider when deciding on the level of delegation most suitable for them.

Can all schemes make use of fiduciary management, or does there need to be specific investment powers in the scheme’s rules?

Any scheme can appoint a fiduciary manager—there’s nothing specific in the scheme rules that needs to be added. We see schemes of all sizes, from the single millions, up to the multi-billions, accessing the benefits of fiduciary management.

It is for the trustees to decide upon the appointment of their professional advisers (including, for example, whether to appoint a fiduciary manager, and which fiduciary manager is most suitable). However, the sponsor might well wish to have input on this decision.  Sometimes, the sponsor will need to be consulted on the agreed investment strategy prior to implementation.

All sounds great, in theory. But is fiduciary management expensive?

Fiduciary management is not necessarily a cheaper or a more expensive option. It should be cheaper for a scheme to access investment opportunities through fiduciary management, thanks to economies of scale. That said, final costs will naturally depend on the asset classes and managers being used within the portfolio.

I’m curious, how does a scheme go about appointing a fiduciary manager? Do they need an investment adviser to make an initial recommendation, or to monitor ongoing suitability?

A: Often, the tender process involves an RFP, followed by several presentations. Under competitive tendering rules brought about by the Competitions and Markets Authority (CMA) a few years ago, the trustees need to approach a minimum of three fiduciary management providers to tender. Over the last few years, we’ve also seen an increase in the use of professionals—either professional trustees or third-party evaluators (TPEs), who help run fiduciary management tender processes.

It’s up to the trustees to decide how they monitor their fiduciary manager. Some use TPEs, some use independent trustees, others feel their board has the capacity to oversee and manage the fiduciary manager independently, providing reporting is transparent and the objectives are clear. From my experience, boards identify any gaps they may have and bring in skills to complement this. 

Just thinking aloud here—say a scheme hopes to secure annuities and wind up in the next ten years. Is fiduciary management still appropriate or relevant for that scheme?

A: Fiduciary management is a very useful tool in this respect. As the scheme becomes better funded, it is increasingly important to dynamically lock in gains. Likewise, as the scheme approaches buy-out, it becomes more important to invest with due consideration of insurer pricing, whilst also managing the liquidity of investments in accordance with the scheme’s investment time horizon. A fiduciary manager can help with this, and manage other risks, such as those associated with operations, cash flows, and levered exposures (e.g. LDI).

On a similar theme, how easy is it for a scheme to change its investment strategy, perhaps in response to a change in the fortunes of the sponsor, or significant volatility in financial markets, as we saw in September 2022?

The ease of changing the investment strategy within the fiduciary management model depends on the arrangements and governance structure established between the fiduciary manager and the trustees. In most cases, the fiduciary manager and trustees collaborate to regularly review and modify the investment strategy as needed.

Working with a fiduciary manager may offer several advantages, in terms of both flexibility and the speed at which decisions are made. For instance, an agreed journey plan enables a proactive approach to strategy change, enabling timely adjustments in response to changes in the scheme’s required investment returns. Typically, a fiduciary manager would also be granted the authority to execute certain investment decisions on behalf of the scheme. This means they are able to take action as required to avoid significant risks (as seen in September 2022), change the underlying investment managers, or switch the investments themselves in response to the changing macroeconomic environment.

​​​​​ Right. So say a scheme decides to partner with a fiduciary manager. How often should that scheme receive updates on performance?

How often does the scheme want them? Trustees should expect at least quarterly updates on the performance of assets versus liabilities, which aligns with quarterly trustee meetings. They should also expect monthly updates on investment performance, and they should be able to access this information online whenever they need to.

You mentioned that a fiduciary manager will work with their client to understand the investment and risk targets they’re working to. What about environmental, social and governance (ESG) requirements? Can a scheme specify these, or are they determined by the fiduciary manager?

Accommodating specific ESG requirements will depend on the capabilities of the fiduciary manager and, generally, the scale of the client’s assets. Is the fiduciary manager sourcing investments from the open market? Are they using in-house funds, or are they using pooled, growth funds that tend to be more one-size-fits-all? Trustees should bear this in mind when selecting a fiduciary manager—with some providers, it is unlikely small and medium-sized clients will be able to create custom solutions.

Finally, does SEI offer training on fiduciary management for schemes keen to find out more about the service?

We offer training on fiduciary management, and we are very happy to offer it for free to schemes interested in finding out more.

What we find makes training more engaging is to use real-life examples, which we can do if the trustees are happy to share their scheme’s high-level information. This information usually encompasses standard documents, like last quarter’s investment report, or the latest scheme actuarial valuation report, and perhaps the scheme’s statement of investment principles (SIP). This offers a great way for the trustees to understand how fiduciary management might better help them achieve their objectives.

IMPORTANT INFORMATION

A version of this article was originally published by MHM.

This article is provided by SEI Investments (Europe) Ltd ("SIEL") with the full permission of MHM. This article is provided by SEI Investments (Europe) Ltd ("SIEL"). SIEL is authorised and regulated by the Financial Conduct Authority. Financial Services Register Firm Reference Number (FRN) 191713. Registered office; 1st Floor, Alphabeta, 14-18 Finsbury Square, London EC2A 1BR. Registered in England and Wales – company number 03765319. While considerable care has been taken to ensure the information contained within this article is accurate and up-to-date and complies with relevant legislation and regulations, no warranty is given and no representation is made, as to the accuracy or completeness of any information and no liability is accepted for any errors or omissions in such information or any action taken on the basis of this information. The value of an investment and any income from it can go down as well as up. Investors may not get back the original amount invested. The views and opinions expressed by the external interviewees shown are theirs only and SEI has no liability for the accuracy of this content. These views and opinions may not be shared by SIEL. The views and opinions of SEI spokesperson Charles Marandu should not be taken as investment advice and are subject to change.