When choosing a financial adviser, the personal relationship is key, so wise trustees choose an advisory form that is sensitive to the specific needs of their scheme, as Pádraig Floyd explains

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The pensions landscape has undergone considerable change, but advisers to pension schemes have struggled to adapt.

Business models have changed, with some advisers adopting – or rejecting – corporate platforms and fiduciary management offerings. There has also been a proliferation of smaller advisers competing with the larger, more established firms.

With so much competition trustees are spoilt for choice, so how do they determine which are the right consultants for their scheme?

Any trustee board looking to appoint an adviser should look carefully at why it is considering a change. There are a number of possible reasons, the primary one being governance.

Perhaps your scheme automatically goes to market every six or so years.  Perhaps you haven’t given your advisers a thorough review for some years and you’ve decided to do so to improve corporate governance.

It is important to determine if there was a flaw in the previous tendering process”

Finally, if you are looking to change because your current adviser is unsatisfactory, just why is that so? What has the trustee board done to influence/monitor/change this? Has there been a major – perhaps catastrophic – service failure? Is there a clash of personalities?

This is not about apportioning blame, but it is important to determine if there was a flaw in the previous tendering process, such as unrealistic expectations on the trustees’ part, a failure to pin down key performance indicators or a lack of good management in the interim. 

The importance of relationships is paramount, says Darren Redmayne, UK chief executive and managing director of Lincoln International.

He says: “In dealing with your advisers, in many ways, there’s no difference from how you might seek to get the best out of a team member or colleague.”

Respondents to The Pensions Regulator’s Trustee Landscape Research acknowledged some skills gaps among their boards, namely being able to challenge the advice of advisers and administrators and assessing value for money.

Schemes with only professional trustees were more likely to be well run, for example in their ability to assess the value for money of investment advisers.

Small schemes were less able to afford advisers and were less able to challenge their advice.

DC-only schemes also scored lower on challenging their advisers than their DB only or DB and DC counterparts.

Overall, the majority of trustees rarely disagreed with their advisers with 24% never disagreeingand 58% rarely doing so.

Redmayne says the four cornerstones to good relationships with advisers are good communications, constructive feedback, working with them in partnership and not treating them in silos.

While the first three require a two-way process, the later is entirely in the hands of the board.

For instance, the Pensions Regulator has identified the three fundamental risks of covenant, investment and funding risk and has increased its focus on how schemes tackle them in an integrated fashion.

Many schemes call in their advisers separately to trustee meetings, instead of bringing them all together so each party may achieve a more holistic understanding of the challenges faced by the fund.

Many schemes call in their advisers separately to trustee meetings, instead of bringing them all together”

This is a component of working in partnership, but equally important is open communication and constructive feedback. People cannot remedy a perceived problem unless they are aware of it. Similarly, saying thank you or well done can have a considerable impact.

Redmayne says: “We work hard for all our clients, but being told you’ve done a great job is very motivating and greatly appreciated.”

 

It is essential to find someone you can work well with, says Barbara Saunders, managing director of asset solutions at P-Solve. And, as in any relationship, it needs to be someone you can trust.

“There are some basics,” says Saunders. “They need to have enough scale to provide the modelling, and you shouldn’t necessarily appoint the cheapest advisers, though certainty of fees and transparency are key.”

But this doesn’t mean they have to be an international advisory firm to be considered in the mix.

You shouldn’t necessarily appoint the cheapest advisers”

“Size doesn’t always matter,” says Saunders. “We’ve won clients from big four firms as they’ve felt they’ve been neglected or that the fees were too high.

“This is why the big four firms are no longer dominant in advisory in the mid-market and we may see more offerings from those who feel they can offer a more personal service.”

However, she adds that there’s a limit to how small you can go. She believes a very small firm would find few trustee boards willing to select it.

 

Trustees should examine any adviser’s track record and consider whether they are focused on selling short-term projects ahead of building a long-term relationship, says Peter Routledge, a senior consultant at Towers Watson.

Personalities are also important. Do they fit with you as the client? Will they have the necessary resources to service your requirements? Is the firm making an investment in the future of the business, whether that is people (recruitment and retention, training) or technology?

A large firm has the advantage of strength in depth”

Routledge adds that when it comes to small firms, it is important to look at the ownership structure. Who owns it and how long have they been around for? Also, consider if there is a heavy reliance on one individual, what are they doing to mitigate key-man risk?

“If it’s a one-off project it may be a low risk, but a long-term relationship like a scheme actuary over five years  or more, means that risk is greatly increased,” he says. “A large firm has the advantage of strength in depth, and because we work across many clients, we can provide good benchmark survey data. We will also have come across problems with our clients and packaged solutions for application at small schemes.”

 

Smaller organisations suit smaller clients – with hundreds of millions of assets rather than billions – where they can offer a greater focus on client needs, says David Deidun, a partner at Quantum Advisory.

He says in a smaller firm you can have fewer clients and give them a better service, making senior partners more visible within the business. People like him have done their time with the large organisations and believe they can respond more effectively than a big outfit where hierarchy can get in the way of decision making.

Deidun accepts that for international clients a large company would make sense but rejects the idea that they offer any better service. 

Often a larger organisation pushes servicing down to more junior levels to remain competitive”

“Small advisers would be hard pushed to support large projects, but some of the larger organisations have a smokescreen and the teams looking after clients are no bigger than in many smaller advisory firms,” he says.

“Often a larger organisation pushes servicing down to more junior levels to remain competitive, but small firms may have more experienced individuals running a client.”

Deidun is convinced a smaller organisation is better able to adjust service proposition and provide a bespoke service. 

“We should be more competitive on fees as we don’t have the overheads of larger firms,” he adds, “and we can spend time developing our proposition in an entrepreneurial way to meet the future needs of our clients. You simply don’t have that luxury in a large firm where the pressure is on to earn fees.”

 

The smaller, independent firm has flourished in recent years.

“Being independent means probably a better service, better thought-through solutions and ownership of the relationship much better than in a large corporate, offering clients a better return for their money,” says Deidun.

Being independent means probably a better service”

There are those who would warn against an over-reliance on independence. All advisers can face a conflict of influence and being aware of these is essential. After all, to be truly independent means presenting a client with solutions that could lead to that contract being terminated.

Ultimately, pension schemes need to ensure they follow a process of due diligence and apply scrupulous levels of governance when looking to appoint a new adviser.

Relationships are important, but trustees mustn’t let sentiment – or prejudice – get in the way of giving the right person the job.