Fiduciary management: What is it and what are the benefits?

Fiduciary management (FM) refers to the combination of both investment advice and outsourcing of the day-to-day management of a pension scheme to a fiduciary manager. In delegating investment tasks to a third party, trustees are able to focus on the strategic decision-making and long-term outcomes - while other fiduciary duties are transferred to the FM provider.

Who uses fiduciary management, and why?

In the UK, typically defined benefit pension scheme trustees’ partner with FM providers to satisfy a range of objectives, including enhanced governance structure, improved funding health, decreased volatility and lower costs.

How can fiduciary management help establish a robust governance structure?

At its core, FM is a governance solution. The traditional governance model used by organisations to make investment decisions is rife with shortcomings, many of which have been exacerbated by today’s increasingly complex regulatory and investing environment.

Decisions need to be made at every stage of the investment process, from putting investments in place to monitoring and managing the portfolio on an ongoing basis. By selecting the right FM partner, trustees are, in our opinion, better able to do the following to improve their investment outcomes:

  • Identify investment opportunities
  • Proactively manage risks
  • Comply with regulatory developments

In the wake of the global pandemic - which caused significant market dislocation - increasing numbers of UK pension schemes are re-assessing their management and governance model.

How can fiduciary management help improve access to best-in-class asset managers?

In today’s investment landscape, we believe the traditional model of pension fund investing is sub-optimal. The historical approach has used a static asset allocation, based on advice from consultants. It often takes between 12-18 months for changes to be proposed, agreed and implemented within the investment portfolio.

The right FM provider will not only have a dedicated team of in-house specialists to provide daily oversight and strategic advice, but also offer improved access to best-in-class investment managers on a global scale. A leading FM provider will be able to extensively research and rate hundreds of investment managers and opportunities to find those ideally suited to a pension scheme’s portfolio. In addition, skilled providers will possess a comprehensive risk management system - a necessity for effective portfolio management today, in our view. These systems typically show aggregated portfolio exposures across multiple managers, with a view of how exposures are likely to affective both risks and rewards - all with the click of a mouse.

Can fiduciary management provide cost savings?

Many pension schemes can also save significant amounts of money by outsourcing some or all of their investment management function. How? There is a well-documented inverse relationship between asset management costs and portfolio size. In other words, large fiduciary management providers - with significant assets under management - can use their scale to negotiate more competitive rates with underlying investment managers. In aggregating this buying power, FM providers can pass along these efficiencies, which are, quite frankly, unachievable when a scheme negotiates independently.

Another valuable feature offered by some FM providers is transition management. Where the expertise is available, it should be harnessed in asset allocation or investment manager changes to reduce unnecessary costs and risks. The cost-saving benefits of this can be substantial.

Can fiduciary management integrate ESG factors?

FM is about using the expertise of the chosen provider and making the most of their investment capability. This includes understanding their processes - including how they are capturing and utilising ESG factors. By hiring a specialist who acts as an extension of their own resources and preferences, trustees can improve the likelihood of achieving their overall objectives - both in performance and in ESG.

Whilst ESG factors do impact security prices, we believe they do not have to mean sacrificing performance. In fact, building an investment portfolio that has a greater focus on ESG considerations could potentially even improve investment returns.

FM clients can benefit from a holistic approach to ESG integration across business and culture, rather than it being a separate consideration or afterthought.

Can fiduciary management also help with back-office functions?

Investment outsourcing also means that the FM provider takes charge of the associated daily administrative tasks, reducing the strain on trustee resources. This, in turn, frees up more time for the trustees to spend on core business activities - while simultaneously ensuring that its fiduciary duties are still being carried out.

The bottom line

In today’s topsy-turvy world, companies are beset by a multitude of challenges. Investing shouldn’t be one of them. FM continues to provide greater governance, transparency and consistency for those who want to improve the outcomes for their schemes and, ultimately, for the members they represent.

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