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CMA Final Report – When choice overload becomes no choice?

CMA Final Report – When choice overload becomes no choice?

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On 12 December 2018, the Competition and Markets Authority (“CMA”) published its final report on their findings and decisions from the Investment Consultants Market Investigation. One of the remedies the CMA has put forward was to place a duty on pension scheme trustees to carry out a competitive tender before appointing a fiduciary manager (“FM”) for a mandate size which is at least 20% of the scheme’s total assets.

Well, I applaud the CMA for its clear and refreshingly bold conclusions.

Over the past few years, I have worked with a number of trustee and company boards, including those who were already in a fiduciary mandate, and those who were in the process of selecting a FM. There was always a common theme running through them at the outset of my relationship with them – confusion.

Confusion 1 – because they have entered into a fiduciary mandate, often without independent advice or a tender process, and now, they are not sure if they have made the right choice with the fiduciary manager they have selected.

Confusion 2 – for schemes that are not yet in a fiduciary mandate, but given the amount of industry profile around FM, trustees feel the pressure not to miss out on a much talked about solution.

Confusion 3 – What was the problem I was trying to solve in the first place?

But how is this related to choice?

Choice Overload – a term which was first introduced by an American author in the seventies, describing a state of mind when people find it difficult to make decisions when they are faced with many options. This psychological state occurs particularly when the options appear very similar with no clear superior difference. I have observed many clients who are in the early stages of kicking off a fiduciary manager search, choice overload appears to be a common symptom.

While the feeling of no choice could obviously lead to frustration, choice overload can be equally as dangerous to the mind and lead to confusion and unhappiness. I know my role as an investment adviser is no life-saving hero, I do however consider myself crucial in part of this process to help our clients out of this mental state called choice overload.

In the CMA report, 17 organisations were deemed to be offering fiduciary management to UK pension schemes. As I was writing this article, another asset management firm who is not currently on that list has decided to enter this market. It is a very crowded market.

So what can we do to overcome choice overload so that options bring us empowerment rather than confusion?

These are my 5 steps to tackle choice overload.

  1. Identify the problem you actually have – remember confusion no. 3 above? Sometimes, I see clients who are so engrossed in the details of selecting a fiduciary manager they forgot why they needed one in the first place. In a selection process (or indeed any other decision making process), I often ask my clients to articulate in their own words why they want to go into a fiduciary arrangement. A clear articulation from the client of the reasons is often a sign that the adviser has done her job right.
  2. Define a timeline – most of the time, there is not a deadline to select a fiduciary manager. However, you should always set one in any case. This avoids the indefinite act of ‘kicking the can down the road’.
  3. Control your curiosity – everyone has the desire to delve deeper and deeper into every detail that arrives at the scene. However much information you have, there will always be more. Don’t let it be an excuse not to make a decision. Step 2 helps to remove this barrier.
  4. Compartmentalise your decisions and prioritise your needs – selecting a fiduciary manager may sound like a simple single-step decision. In practice, it is never the case. Once you begin the process, you will begin to battle with how to select one. How important it is to you how the fiduciary manager constructs your portfolio? Is it important to you that you ‘gel’ with the team? How willing is the FM adapt their business model to tailor to your needs? Almost always, cost is only a partial factor. If you have carried out step 1 well, this will feel like a breeze. Break down the decisions and the final one will be much easier to make.
  5. Technical investment knowledge and expertise – although this is the last on the list, it is in fact one of the most crucial ingredients in the evaluation and selection of fiduciary managers. Portfolio construction and pension scheme journey planning are not typically trustees’ day jobs. To assess whether a complex portfolio is worth paying for requires fundamental technical knowledge. Appoint an adviser who has the investment know-how to run your process. FM selection is not a procurement exercise to see who is the cheapest.

Overall the findings in the CMA report are very encouraging for this industry. I note however that compulsory tender does not address the most important decision of all – does a fiduciary mandate actually fit with the client’s overall objectives?

I believe expertise in fiduciary management evaluation, selection and oversight is not only important to trustees who wish to pursue a fiduciary mandate, but ability to help clients express their investment objectives and align them with an appropriate investment solution – Objective Driven Investments – is key to the role of an adviser. That means clients should always be in the centre of an investment solution, not the other way round.

This article is aimed at Professional Investors only and is not aimed at Retail Clients. It should not be regarded as providing specific advice or a recommendation of suitability.