Investment consultants recommending themselves to manage their clients’ assets could be breaking US federal pension law, according to a letter circulated by the country’s Labor Department.
The document, uncovered by the Wall Street Journal, showed an insight into the department’s thinking, which could result in new laws to control how advisers interact with their pension clients.
The letter’s author, Assistant Secretary of Labor Phyllis Borzi, oversees the Employee Benefits Security Administration and has been deeply involved in the relationship between investors and their advisers—both institutional and retail—since taking up the post.
Her 24 September letter centres on whether a consultant is classed as a fiduciary when giving advice to its pension client. The issue of whether these service providers should put their clients’ interests above their own has been a contentious one for some time. In 2010, the Department of Labor proposed such a requirement, but the move was dropped after an outcry the financial sector.
The recipient of the most recent letter, Democratic Congressman George Miller, himself raised the question of conflicts of interest in the market in June.
He called on the Department of Labor to look into the practice as it created new governing rules on the role of advisers.
Within the industry itself—on both sides of the Atlantic—there have been growing tensions on the matter as the number of assets managed by so-called “outsourced” or “delegated” providers has increased.
Large investment consultants have, in some circumstances, evolved to offer a wide range of money management products to their clients. According to its website, Towers Watson is “responsible for over US$55 billion of delegated and fiduciary assets worldwide”.
About 80% of UK pension funds planning to take on a fiduciary or outsourced manager employed investment consultants such as Aon Hewitt, Mercer, or Towers Watson, according to a market survey last year by accounting firm KPMG.
Anecdotal evidence provided to CIO suggests some consultants have refused to work with clients on anything other than a fiduciary management basis. Many consultants appointed to a fiduciary role are the incumbent investment consultant, which develops the existing contract with its client.
In the US, there have been several incidents highlighting the confusion—and tensions—within the outsourced market. JP Morgan has been sued by an outsourced CIO (OCIO) client for making, what the client felt to be “clearly unsuitable investments”. The bank-owned asset manager responded that it had full control over the portfolio at the time and requested that the lawsuit be thrown out of court.
Earlier this month, the board of the San Diego County EmployeesRetirement Association voted—by one—to retain the services of OCIO Salient Partners, an investment manager that also employs other a third-parties to manage its clients’ money.
Several board members had been unhappy with the company’s investment decisions and pay structure—despite it being approved at the outset of the relationship—but the majority agreed to renew the company’s contract to run the $10 billion fund’s assets.
The Department of Labor declined to offer further comment on the letter to the WSJ and were unavailable for comment at CIO press time.
Related content: CIO’s 2014 OCIO Survey & How investment outsourcing needs to change—or unravel