Outsourcing boom opens door for new breed of monitors

The growth of fiduciary management and outsourced chief investment officer contracts is translating into an increase in third-party search, selection and monitoring firms, seizing their chance to get in on the action.

Money management, fiduciary management and consultant sources said they have seen an increase in the number of firms offering to help pension funds in the U.K. and the U.S. to search for, select and monitor their fiduciary managers, outsourced CIOs and implemented or delegated consulting providers.

Among the big names that have taken their experience in investment consulting and branched out into the relatively new area are KPMG, Ernst & Young Global Ltd. and Buck Consultants. But sources said new firms are popping up on their radar, with second-tier consultants, independent trustees and even law firms now coming to the market.

Steven White, London-based managing director for Europe at Buck said the business is growing, spurred in part by demand from pension fund clients. “Those (pension funds) with fiduciary management in place for some time are questioning whether or not they should have greater oversight and monitoring of that fiduciary manager,” he said.

Anthony Webb, London-based executive consultant in KPMG's investment advisory unit, said, “there has been a definite increase in the last year. Interestingly, we are seeing more people get involved from the non-traditional sources,” such as law firms and independent trustees.

The U.K. fiduciary management market grew 22% to £72 billion ($108.4 billion) in the year ended June 30, said KPMG's annual latest survey of the market; the increase is 17% when two new providers in the survey are excluded.

More than 300 U.K. pension funds are now using fully delegated fiduciary management, up 44% compared with the 2013 survey, or 16% excluding the new entrants.

“Being a fiduciary management search firm is big business,” said Shamindra Perera, managing director and head of Russell Investments' pension solutions group in London. “It is not just about the search, but conducting ongoing reviews.” Russell's fiduciary management assets under management could not be learned by press time.

The real explosion in opportunity — and new entrants to the market — is in the ongoing monitoring and evaluation of fiduciary managers, said sources.

“(Many) service providers in the U.S. and the U.K. (have) figured out how they play in the fiduciary management market,” said Tom Murphy, Boston-based U.S. head of fiduciary management at Mercer LLC. “Some firms have sensibly said "Do we really want to be another fiduciary management provider, or should we use our resources and skills to access this market segment in a different way?' You have to invest millions of dollars to be a serious fiduciary management player — whereas the cost of entry to be an intermediary is very low if you have the investment consulting background.” Mercer's fiduciary management assets could not be learned by press time.

EY provides ongoing services covering fiduciary management to about 40 clients, said Iain Brown, London-based partner. EY looks at the value added from investment performance — the “financial area” — and the “non-financial” side of recruitment, talent retention, client growth and development of the offering itself.

“The third area, which is gaining a lot of traction, is the examination of internal controls and practices at the fiduciary manager,” he said. That includes operational risks and controls, hiring and firing managers, and even information technology infrastructure. “Clients are beginning to see that it is necessary to understand what goes on behind the scenes, and are testing their fiduciary managers.”

The managers are noticing it, too. “We had a (fiduciary management oversight provider) come in recently,” said Russell's Mr. Perera. “On our side, we calculated they spent 60 man hours over a month looking at us, reviewing us and doing due diligence on everything we did for the pension fund.”

Other firms have ruled themselves out of offering fiduciary management, but have jumped on the peripheral services bandwagon. Buck Consultants launched its service, focusing primarily on the valuation of the fiduciary manager, two years ago.

“We believe it is important, and there is clearly a growth of interest in fiduciary management across U.K. pension funds,” Buck's Mr. White said. “We decided that it would be based on detailed research, getting out and spending time researching the fiduciary managers from top to bottom. It is about meeting people, not just having a phone call.”

Investment consultant Barnett Waddingham LLP is moving into the monitoring area. “That is on the grounds that we perceive a need from our clients that are currently (using a fiduciary management arrangement) now want it independently monitored,” said David Clare, partner at Barnett Waddingham, based in Liverpool, England, and Leeds, England. “What you need is to give the trustees the information to ask the questions that (fiduciary managers) wouldn't want to be asked.” Barnett Waddingham offers ongoing monitoring for pension funds with fiduciary management arrangements in place. Mr. Clare said the firm's clear stance on not being a provider of fiduciary management itself is important to its clients.

But in the U.S., things are not that far along. “Oversight is in an embryonic stage in the U.S.,” said Mr. Murphy. Mercer has more than 200 OCIO clients, he said, “and in the last year we have seen only three or four clients bringing in a third-party provider to review the relationship.” However, he said the U.S. is on the “same path as the U.K., just at a different point, so we expect to see more reviews going forward.”

While increased demand for oversight of fiduciary management arrangements is seen as a positive, a concern over the process of selecting the manager in the first place remains.

Of the almost 100 new fiduciary management contracts in the U.K. identified in KPMG's survey, 75% were won on an “uncontested basis,” with no fee quote from any provider but the one that won the contract.

Of the remainder, 10% were run as shortlist searches by the pension fund; 9% were open market searches run by the pension fund; and 6% were open searches run by an independent party, the KPMG report on the survey said.

“When the industry began, it was normal for fiduciary management to become an extension of an existing relationship,” said KPMG's Mr. Webb. “That is becoming less frequent. But the process in general could be even more robust — I think there is room for improvement in how we work as an industry to make sure that the right fiduciary manager is matched up with the right scheme.”

KPMG advises pension funds with combined assets of just more than £30 billion — it does not break out the value of fiduciary management arrangements. The firm does not offer fiduciary management.

What is positive is that the demand for the third-party monitoring is coming from the pension funds, said Mr. Perera. “The market is becoming more discerning — people understand the differences in offerings” from the fiduciary management providers.

He said Russell is involved in a search for which the pension fund invited 15 respondents to its RFP to make an initial pitch, and then “whittled that down to seven. They are coming to the offices, they spend time here, and doing that across all seven providers. Usually a site visit happens when a client is down to just three or so providers.” This search, he said, is being conducted by a third-party provider. He would not identify the pension fund. n