The advantage of so-called most-favored-nation, or client, clauses - which promise money managers' lowest fees to pension sponsors - is mostly an illusion, according to Edward A.H. Siedle.
Plan sponsors have typically included such a clause with their managers, notes Mr. Siedle, president of consultant Benchmark Cos., Lighthouse Point, Fla.
"Unfortunately, the language in most MFN clauses is open to tremendous interpretation," he wrote in a report to clients. "Managers may contend a client paying a lower fee is receiving a different asset management service, and therefore the MFN clause does not apply."
"Firms differ in their understanding (of) the meaning of such clauses in their clients' contracts," he writes. "A single large investment advisory firm may be subject to hundreds of such clauses in their contracts."
Mr. Siedle contends pension sponsors are lax about monitoring compliance of the clauses, often leaving it to the manager "to notify the client it is entitled to a fee reduction." But, he wrote, "Many managers cannot be relied upon to volunteer such information against their financial interests."
He advises, therefore, that pension sponsors "should contact other pension clients of the managers to determine whether the fee they paid was the same or lower."
Pension sponsors "that rely upon `most-favored-nation' provisions to ensure they are paying the lowest possible investment advisory fees are missing the boat," he concludes. Such a clause "is no substitute for informed, vigorous fee negotiation."