The Metropolitan Government of Nashville & Davidson County Benefit Board in Tennessee could break new ground with a fee audit it initiated of the money managers the $1.3 billion pension fund uses.
Such audits are long overdue. In their drive for performance, plan sponsors and consultants have neglected to scrutinize money management fees.
Audits by plan sponsors of the price they pay for doing business with their money managers might appear a mundane bit of consulting. They are anything but that. If the bull market was more about money manager performance than anything else, the bear market could turn out to be more about bringing a fuller measure to the monitoring of those money managers.
How do sponsors know how the fees they pay compare to those paid by other clients with similar-size accounts for the same strategy? How do sponsors know the so-called most-favored-nation clauses - frequent promises that the fee will be no higher than the lowest paid by clients in similar accounts - on money management contracts are in force?
The Nashville-Davidson fund hired Benchmark Financial Services Inc., Lighthouse Point, Fla., to conduct an independent review of the fees. Edward A.H. "Ted" Siedle, Benchmark president and a former Securities and Exchange Commission attorney, said there is a lack of information about the actual fees sponsors pay.
Mr. Siedle found in his research that one sponsor was paying 20 basis points for a particular portfolio strategy, while another sponsor was paying 80 basis points, or four times that, for the same strategy for the same size account with the same manager.
And what information exists is usually about published fees, not the actual fees pension funds pay. That too may change, as the Independent Consultants Cooperative, a group of 16 consulting firms and Deutsche Bank, is initiating a study of the fees sponsors pay managers. Notes Howard H. Pohl, principal with Becker, Burke Associates Inc., Chicago, one of the members of the ICC: "Any relationship between those published fees and what you actually pay a manager is total coincidence."
Or as Mr. Siedle put it, "Studies based on published fees are worthless."
Karl F. Dean, director of law for the Nashville-Davidson Metro government, said the fee analysis is an outgrowth of a 2000 audit of the fund by KPMG Investment Consulting Group, New York, which found inherent conflicts of interest, involving soft-dollar payments and directed brokerage, with PaineWebber Prime Investment Consulting Group, when it was the fund's consultant. That audit led to a $10.3 million settlement this year by UBS PaineWebber, the successor firm, and its then-consultant William Keith Phillips.
Money management fees have risen 12% in the past 10 years, Mr. Siedle said. Granted, money flowed into equities and out of fixed income during this time, and equity asset management fees are, historically, higher than fixed-income fees. Still, there should have been some economies of scale at work, whereby fees drop as the size of the client's account rises.
While learning themselves, consultants need to educate their clients on money management fees. By keeping too narrow an eye on performance, sponsors and consultants haven't looked enough at cost and compliance.