Fiduciary Management Vs Implemented Consulting
SEI debates the Pros and Cons of the pooled fund and segregated
Over the last year Fiduciary Management and its sister approach, Implemented
Consulting, have grown in popularity as an alternative to the traditional pension fund
management model. Many pension funds may be faced with confusion over how
these two different but related approaches can be compared and assessed. In this
paper we will seek to define each approach and identify and clarify the potential
differences comparing the benefits of each approach.
Fiduciary Management vs Implemented Consulting – What is the difference?
Both Fiduciary Management and Implemented Consulting share the premise that
delegating some Trustee governance functions may be advantageous for pension
fund Trustee boards. In practice this means that one company, the ‘Fiduciary
Manager’ or ‘Implemented Consultant’, is responsible for providing risk management,
investment advice, implementation and oversight of the pension fund’s investments.
This differs from the traditional model of pension fund governance in the UK where
the pension fund Trustee body is responsible for managing and engaging multiple
advisers and asset managers providing different and often unrelated advice.
The key area of differentiation between Fiduciary Management and Implemented
Consulting lies in the area of investment implementation and the extent to which
Trustees are able to delegate their responsibilities for manager selection and
In the Fiduciary Management model Trustees are able to fully delegate responsibility
for manager selection, monitoring and replacement. SEI believes the most efficient
approach to delivering this delegation model is through the use of a pooled fund
structure. The Trustees contract with only one company, the Fiduciary Manager, and
the pension fund assets are invested in pooled fund structures with underlying
portfolios of multiple asset managers for each asset class. In this model,
accountability for the individual asset manager relationships and their performance
clearly rests with the Fiduciary Manager.
In the Implemented Consulting model Trustees do not typically fully delegate their
accountability for manager selection. Whilst the Implemented Consultant will identify
and ‘recommend’ specific managers / implementations, the relationship between the
Trustees and the asset managers is typically on a segregated basis meaning that the
Trustees will continue to contract with each asset manager individually and will
therefore retain legal accountability for the relationship and each selected asset
manager’s performance. While there are exceptions to this type of process, by and
large it is the most prevalent in the Implemented Consulting industry.
Given the perhaps subtle differences between the two approaches, we thought
it would be helpful to open the discussion on the pro’s and cons of each.
By its very nature the pooled fund structure of Fiduciary Management leads to full
delegation of the manager selection/deselection decision. This “full delegation” may
be associated with a sense of loss of control by the Trustee board. On the other hand
it can allow the Trustees to focus their time and resources on the strategic scheme
decisions, therefore arguably providing enhanced control over the most important
contributors to overall plan success. In the Implemented Consulting Model utilising a
segregated fund approach, the Trustee body may retain the final decision on
manager selection/de-selection. While the Implemented Consultant may
“recommend” a particular manager / course of action, ultimately the Trustees retain
the final decision. Trustee bodies may associate this “partial delegation” with
retaining some control over the implementation process.
II. Fees and Costs
The pooled fund structure of the Fiduciary Management approach offers the benefit
of realising economies of scale both when negotiating fees with asset managers and
when covering transaction and administration costs which can be shared between all
members of the ‘pool’. This is in contrast to a segregated approach where negotiation
on fees with asset managers can be significantly more difficult due to the relatively
low buying power of individual pension funds. In this model, unlike in a pooled fund
structure, the pension fund is responsible for negotiating fees directly with the asset
manager on an individual basis and is exclusively responsible for any transaction or
administration costs incurred.
III. Administrative Burden and Speed of Implementation
Contract negotiations can take significant time and legal resources. When using the
pooled fund structure offered by Fiduciary Management this is limited to one contract
between the Trustees and the Fiduciary Manager. This will require time and focus but
only occurs once. In the event of a manager change the Fiduciary Manager takes
responsibility for contracting with the managers, with a focus on leveraging
administrative and contractual experience and minimising the associated time and
cost. In the case of a segregated fund approach offered by Implemented Consultants
individual contracts with the pension fund are required for each asset manager. This
can be a significant burden for Trustees and, although assistance can be provided by
the Implemented Consultant, ultimately the contract is required to be between each
individual asset manager and the Pension Fund. Each time a manager is changed
contract and fee negotiations will occur leading to potentially significant
implementation time and incurring cost for the Pension Fund.
IV. Fiduciary Obligations and Accountability
In a Fiduciary Management approach, utilising pooled funds, responsibility for
manager selection, oversight and replacement is clearly delegated to the Fiduciary
Manager. This means that the Fiduciary Manager is accountable for the decisions
made and can be held legally responsible for any issues with the asset managers. In
addition, because the pooled fund approach necessitates a fee structure based on
assets under management, the goals of the Fiduciary Manager are directly aligned
with the pension fund increasing accountability. In the segregated model typically
offered by Implemented Consultants, accountability is less clear. If the Trustees have
contracted directly with each asset manager then they remain accountable for the
asset manager’s performance. As such, measurement of the Implemented
Consultant’s success may become difficult; particularly to the extent the Trustee
board does not follow all “recommendations”. In addition because fees will be paid
independently to multiple parties, the individual asset managers and the
Implemented Consultant, goals are likely to be less aligned leading to reduced
accountability for performance against goals.
V. Oversight and Transparency
A key benefit of a Fiduciary Management approach utilising pooled funds is the ability
to take a full view of the pension fund at any time. This offers complete transparency
on a daily basis to the Fiduciary Manager for enhanced risk management. This
approach also facilitates simple and consolidated reporting available soon after
month end. This may be difficult to replicate by the segregated approach usually
offered by Implemented Consultants because of the complexity of gathering
information from multiple individual asset managers. The approach can lead to
difficulties in consolidating and standardising reporting and risk management
oversight; and provides limited ability to see a full view of the total pension fund at
any given time.
Over the last few years the turbulent market environment combined with increasing
legislation and complexity of investment products has placed an increasing burden
on pension fund Trustees. Both the Fiduciary Management and Implemented
Consulting approaches can help alleviate this burden offering a more effective
governance model. As this paper has shown, the underlying philosophy of these two
models, in combining advice and implementation, is similar but the methods of
implementation can differ. Pension Funds should be encouraged to compare these
two models when considering the replacement of the traditional model with this new
innovative approach to pension fund management.
Fig 1: An overview of the difference between the approaches
Responsibility Fiduciary Management via Implemented Consulting via
the Pooled Fund Approach Segregated Account Approach
Delegation of Full delegation Final decision remains with Trustees
Asset Negotiated by Fiduciary Negotiated with individual asset
Management Fees Manager/Economies of Scale managers by Trustees. No
Economies of Scale
Advisory Fee One asset management fee. No Fees for individual asset managers +
extra fee for advice advisory fee
Contracts Trustees have only one with Trustees have multiple with individual
Fiduciary Manager asset managers
Accountability Fiduciary Manager is accountable Implemented consultant offers no
for performance of asset managers accountability for asset manager
within portfolio performance
Reporting Consolidated and full view of Difficult to consolidate information
pension fund holdings at any time from multiple asset managers
Discussion of fees and costs does not necessarily apply to those that would be
experienced by an investor in the pension fund.
A pooled fund structure is where multiple investors contribute assets which are held
jointly as a group.
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