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Professional Pensions: Fiduciary managers must come clean about their errors

This article was published in Professional Pensions| January 25, 2022

Being open about making mistakes can sometimes be unappealing, but all too often it’s in the interests of everyone concerned.

When we compiled our latest survey of the operational capabilities of fiduciary managers - the results of which we published today (25 January) for the first time - it was striking how little the market would tell us about what happened when things went wrong.

We asked managers for details about the compensation they'd paid to clients in the wake of operational errors. Payments, when made, are typically small, particularly in relation to the size of the assets that are being managed.

Yet less than a third - just 31% - of the managers who received our questionnaires were prepared to give us any detail at all about the sums they'd paid out, and why. 

For the record, of those that did give us the information, 40% paid no compensation at all and 40% paid out sums equivalent to up to £10 per £1m of assets under management.That means that 20%, or a fifth, made remediation payments worth more than £20 for every £1m managed. (We said the sums tend to be small.)

But size is not the point here; it's one of principle and best practice. While it's the right of fiduciary managers not to tell us these things, we think they're making a mistake.Knowing how much compensation is paid out to clients each year is an effective way of monitoring and benchmarking a fiduciary manager's operational controls.

When payouts are high, and stay high for successive periods, it's an effective signal that something could be going wrong in the workings of the firm.

Persistent errors - be it in trading execution, data management, or risk monitoring - can undermine the market's confidence in the practices of a specific business. Likewise, knowing compensation levels can increase confidence in a manager, as this represents proof that the business is tackling procedural problems in their infancy.

A good many of the managers that took part in the survey told us that they couldn't disclose any of the detail because of "client confidentiality".

Frankly, this doesn't wash. Knowing this kind of information is highly relevant to a prospective client; in fact, arguably, they have a right to know if foul-ups - even if entirely accidental - are taking place at the business they are considering hiring to manage their assets and make investment decisions with what is ultimately pension scheme members' money.

We think that trustees should be wary of those managers that are unprepared to 'fess up'; it would not be unreasonable to conclude that they were masking high payments which, were it to be so, would be a serious potential flashing red light over their appointment.

Encouragingly, increasing numbers of fiduciary managers are making the decision to disclose compensation payments for errors, in the belief that it's in the interests of their clients - existing and new - to do so.

To be clear, we applaud those managers that did disclose payment levels this time. We think more should do so, and that clients should expect it.

Andy Clarkson is head of operations research at IC Select


 

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Thursday, 19 May 2022