With the fiduciary market on the rise and more and more clients turning to this type of management, we are increasingly being asked by sponsors and trustees to review some of the fiduciary offerings being touted by advisers.
As we have been through these products, examining their structures and processes, we have been alarmed at some of the significant conflicts of interest embedded within many of the offerings in the industry – with issues arising from the point of sale all the way through to implementation.
Below we have outlined some of the more egregious conflicts to be aware of:
1. The Mis-sell
It is common practice for the independent adviser to a pension fund to recommend their own in-house fiduciary manager without going to market. In fact, a high proportion of fiduciary mandates are “won” on this basis. Just think about that for a minute – independent and in-house, is that best advice?
2. The Upsell
Let’s not get away from the fact that many consulting firms have added fiduciary products as a way to deflect the blame away from themselves for pension fund under-funding and to generate higher margins. Basically, they have taken the same advice they were giving, used the same funds they were recommending, and turned it into a standard product (which in turn makes it less customisable), and then, charged more for it. The result is that clients get less personalised service at a higher cost – with the same results.
3. Double Dipping
Many fiduciary products use in-house funds or platforms. This allows them to either allocate some of the portfolio to sub-optimal funds which generate higher fees for the manager, or worse yet, to be paid twice for the same product. This conflict makes the mis-selling argument even stronger.
4. All Inclusive Package
Probably the most subtle of all conflicts is “all inclusive” pricing plans. The client pays one fee, which includes the fiduciary manager fees, underlying fund fees and sometimes even actuarial consulting. Great, clients know what they are getting with no hidden extras. However, this is probably the greatest scam of all. With this kind of pricing plan, the fiduciary manager is incentivised to use the cheapest funds available and to cut as many other corners as may be allowed in order to generate the highest margin possible.
So, when your adviser tells you that fiduciary is the answer and that he has a colleague who can arrange it for you, make sure, at the very least, that all these conflicts are discussed, aired up-front, and importantly, resolved.