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.
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.
Elsewhere, the board of the San Diego County Employees Retirement
Association voted—by one—to retain the services of OCIO Salient Partners
at the start of this month. Several board members had been unhappy with the
company’s investment decisions and pay structure.
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