The broken consulting model and how fiduciary management can help you

Last time we looked at how the needs of pensions schemes have changed along with the investment landscape. Today we put the spotlight on the broken consulting model and how fiduciary management can help your scheme.

The broken consulting model

The investment consulting model served trustees of defined benefit pension schemes well for many years, driving innovation in asset allocation and risk management. However, its efficacy has been called into question on a number of occasions recently and consultants have been challenged to demonstrate their added value. Once again, reviews of the performance of consultant ‘buy-rated’ products highlight an ineffective process.

Consultants themselves recognise the weaknesses in their process. Chris Ford of Willis Towers Watson described the consulting services they provide to clients as “a very weak process” and that “they don’t think it is the best way to do it” (FTfm 18 October 2015).

The CMA on the investment consulting market

In its assessment of the investment consulting market, the Competition and Markets Authority (CMA) finds “there is a low level of engagement by some customers in choosing and monitoring their provider. It is difficult for them to access and assess the information needed to evaluate the quality….” The proposed remedies of common reporting standards, and clearer objectives should increase engagement and enable trustees to more effectively evaluate their provider.

The challenge with the consulting model may be deeper rooted, however. The traditional consulting model requires trustees to make decisions on the basis of imperfect information and in an environment where outcomes exhibit a degree of randomness. The result of asset allocation or manager selection decisions is uncertain. The traditional consulting model relied on the fact that pension scheme investment horizons were sufficiently long to reduce the impact of variability in returns. However, in the current environment, scheme objectives and market conditions call for dynamic portfolio management.

How can fiduciary management help?

An alignment of the investment solution with the scheme objectives

The scheme specific investment objectives form the starting point of any fiduciary management solution. Objectives should be defined in terms of a target return in excess of the liabilities and level of risk (defined by the proportion of liability valuation risk hedged). These are documented in advance in an investment management agreement. The investment solution is tailored to meet these objectives.

A fiduciary management solution allows trustees to retain control over the decisions that are critical to them. These include the return objective and risk tolerance but may also include other factors, for example, the approach to responsible investing and Environmental, Social and Corporate Governance (ESG) issues.

A dynamic investment approach

The traditional model of pension fund investing with a static asset allocation and a traditional consulting model is not fit for purpose in the current investment environment. Open defined benefit pension funds could rely on time to recover the impact of any investment losses and diversification was the only tool required.

Today, with shorter investment horizons, negative cashflows, and frequent mark to market valuations, pension funds can no longer rely on diversification alone. There is not the time horizon to allow investment losses to be recovered.

Diversification needs to be supplemented with a dynamic approach to managing the assets. This allows emerging portfolio and market risks to be identified early and managed. In a world where it is hard to generate investment returns, dynamic management of the portfolio is a necessity to augment asset allocation.

A robust investment process

With the need for a dynamic investment process comes the requirement for a robust investment process. A fiduciary management solution provides a robust framework for making and reviewing investment decisions. Sophisticated tools can be employed to assess risks and to model the portfolio against potential scenarios.


The clear definition of the investment objective allows for clear reporting of the outcome and makes it easier for trustees to assess the effectiveness of the fiduciary management solution. With the development of industry standard reporting frameworks, trustees will be in a stronger position to make comparisons across providers.

Value for money

Fiduciary management solutions often result in an overall reduction in the cost of running the scheme as economies of scale can accrue to the pension funds. An improvement in fees, combined with a more controlled risk management framework and access to a broader range of investment strategies results in better value for money for scheme trustees.

Seven questions for trustees to ask about their existing fiduciary management arrangements

As fiduciary management has become a mainstream mechanism for managing pension assets, trustees are being called to review their existing arrangements. Below are seven questions for trustees to ask about their existing fiduciary management arrangements.

  1. Is the fiduciary management solution aligned with the investment objectives of the scheme?
  2. Is the solution flexible to meet the changing needs of the scheme?
  3. Was there a clear process for selecting the provider?
  4. Is performance against the scheme objectives presented regularly, clearly and in a consistent format?
  5. Is there a clear investment process that gives confidence in the repeatability of out-comes?
  6. Is there a clear mechanism for assessing value for money, including consideration of performance fees?
  7. Is there independent scrutiny of the investment arrangements by a professional trustee or independent consultant?

Fiduciary management: Deliver to your members

Working with a fiduciary partner gives you access to the resource you need to help deliver to your members. Taking accountability for the day-to-day implementation of your decisions, within a clear framework and guidelines, delivers:

• A more robust approach to your strategy implementation
• Greater transparency and clarity of process
• The ability to utilise specialists to support you in the decisions you make

Learn more about Russell Investments’ approach to fiduciary management.

Any opinion expressed is that of Russell Investments, is not a statement of fact, is subject to change and does not constitute investment advice.