10% use RFPs to find transition managers

GREENWICH, Conn. — Nearly half of pension executives do not use a formal search process when looking for a transition manager, relying instead on either a firm that handled a previous transition or a firm with an existing relationship such as the plan's custodian or money manager, a new Greenwich Associates report shows.

According to the survey of 194 executives, only 10% use a formal RFP process; 45% do not use a formal search process for transition managers; and 44% seek the advice of their investment consultant.

"To the degree that transitions are something done with very high urgency and plan sponsors can turn to people who know their organization well either because they've done it before or they are the custodian or a large passive manager, the results are not surprising," explained William Wechsler, a Greenwich consultant and one of the report's authors.

"But they are (surprising) in that you'd be hard-pressed to find other parts of this business where people leave decisions to such an informal mechanism," he said in an interview.

The 44% of pension executives who use their investment consultant might not be getting the best advice because consultants' knowledge of transition management varies widely, according to the report.

"I think consultants are often demand-led and to the degree they have clients treating transition management as a structured decision, consultants will develop those skills," Mr. Wechsler said. "But to the degree they (clients) say ‘we'll use the guy we used before,' they (consultants) won't develop those skills."

He recommended plan sponsors add ‘expertise in transition management' to their list of criteria when reviewing investment consultants.

In choosing a transition manager, pension executives use up to six criteria, with trade execution and keeping costs down cited as the most important factors, according to the Greenwich report.

A transition manager's responsiveness is also critical. And Mr. Wechsler said the fact that pension executives place a lot of weight on service illustrates their uncertainty about the process.

The other three main criteria plan sponsors use to rate transition managers are depth of experience, project management skills and perceived absence of conflicts of interest.

One reason Greenwich consultants cited for the relatively informal hiring processes is the lack of standards for assessing transition manager performance.

"If you lack confidence in the ability to quantify your goals or judge performance, it is difficult to assess candidates' relative capabilities," Jay Bennett, another author, said in the report.

"Because plan sponsors lack confidence in their ability to measure (transition) performance, they often select managers that they fundamentally trust to do the job well," Greenwich consultant John Colon said in the report.

"However, the fact that plan sponsors do not place more emphasis on a potential manager's willingness to disclose all sources of revenue, including proprietary trading or compensation from outside brokers, suggests again that their level of trust is often determined by their own past experience with individual firms as opposed to the results of a more formal assessment."

The Greenwich survey found that 31% of respondents use their existing global custodian to handle money manager transitions; 20% use an agency broker, 13%, an existing passive manager; 7%, a principal broker; 4%, a different custodian; 4%, a different active manager; 3%, an existing active manager; and 2%, a different passive manager. The remaining respondents were not sure or did not reply.

The Greenwich consultants recommend pension executives pull together a shortlist of transition managers — selected when the plan is not in the middle of a manager switch — to call on when a transition is needed.

"We recommend that people take a step back and not leave this decision to when they are right in the middle of firing and hiring a manager and time is of the essence and they can see basis points withering away in opportunity cost," Mr. Wechsler said.