As profit margins keep being squeezed, those in the investment industry keep stepping on each other’s toes.
When a ship seems to be heading for the rocks, passengers make a dash for the lifeboats; few care if they trample on other people in the process. A similar instinct applies to chasing profit in a falling market. Thus the conflict of interest that has been bubbling between fund managers and investment advisors has come to the surface.
As bottom lines look increasingly beleaguered, the naturally taut relationship between the fund management industry and the investment consultant community has been made more fraught, as consultants encroach onto what asset managers see as their territory – while continuing to act as gatekeepers between them and pension fund clients.
No longer happy to be just actuarial consultants (or even to be called actuarial consultants) they have expanded beyond their core expertise of asset liability modelling to include more value-added advisory and asset allocation services.
The long-term trend away from balanced mandates (where the fund manager has the option to invest in a variety of instruments) to specialist, single instrument mandates – to the point where only 25% of funds are now balanced as opposed to 60% three years ago – which has been accelerated by the downturn, has given investment consultants even greater powers to direct pension funds to selected asset managers. Combine this with the fact that some consultants have even introduced multi-manager offerings whereby they effectively allocate funds between a stable of money managers, but therefore control the overall investment process, and a love-hate relationship begins to err more on the side of hate.
Frustrated fund managers, however, are not able to take consultants to task, for fear of blotting their copy book; punishment for such effrontery would mean being put in front of less pension fund trustees to compete for a mandate. What to do when a crucial entity in the investment chain controls your access to clients and competes with your services?
Well, the empire is fighting back.
Last month, Goldman Sachs Asset Management introduced its own consultancy service called Fiduciary Management. Cannily too, it has targeted German and Scandinavian clients; the power of the consultant is not so pervasive on the continent as it is in the UK, where 90% of pension funds are allocated by investment advisors, compared to about 50% in countries like Germany, France and the Netherlands.
But not to be done down by further cries of “conflict of interest”, GSAM says clients are given the option of not selecting GSAM as a fund manager.
