Date: 19.04.16 Category: Ethics & Professionalism
While most stakeholders believe that improved governance would be clearly beneficial, they also argue that client outcomes could be significantly improved by helping clients to understand what they can reasonably expect of the investment profession so that they temper their expectations and avoid unrealistic promises of high returns at low risk. They also think that the investment profession should educate clients to ignore their own behavioural impulses and to help them identify how they can best extract value from working with investment managers.
Too often, clients are reckoned to fail to exploit the opportunities that their time horizons provide and seen to respond badly to market movements on both the upside and the downside. Stakeholders report that clients appreciate that risk matters when they are establishing their preferred portfolio, but then show little interest in risk-adjusted returns. Similarly, they often react instinctively and inefficiently to short-term underperformance.
Investment consultants ought to be able to help clients – large and small – extract better value from investment management, but there is a general sense that this has not always been the case. Investment consultants act for asset owners, helping them to identify appropriate approaches to managing their assets and helping them to identify the right people to manage those assets on their behalf. In practice, for many schemes, the consultant ultimately operates rather like an in-house investment team, helping the scheme with reporting and administration as well as with asset allocation, manager selection, fee negotiation and manager monitoring.
The criticisms relating to investment consultants are that they accentuate the tendency for asset owners to select managers that have recently outperformed (and that are then likely to underperform due to mean reversion), that they encourage too much activity because of their fee structures and that they have conflicts of interest because, in some cases, they offer products that compete with external managers (such as fiduciary management).
Some consultants have avoided these conflicts by staying out of the investment management business and by operating a fixed and/or flat fee structure. Some stakeholders note that consultants have begun to address challenges to their value creation by being more open about the impact of their advice over time. Others note that, as pension scheme trustees bear a regulatory requirement to seek expert advice, improvements in the competence, capacity and governance of schemes would likely also lead to an improvement in the quality of the market for investment consulting.
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