Great Expectations

15 June 2017

JLT Investment Solutions on the upcoming FCA Asset Management Market Study report

It is now several months since the Financial Conduct Authority (FCA) produced their interim report following the Asset Management Market Study.  Over these months we expect their Inbox to have been filled with a range of suggestions – some helpful and some unhelpful.  It is now expected that the FCA will produce its final report by the end of June.  We at JLT are supportive of much of what was said. 

It would be wrong to say we have done nothing since the publication.  Indeed we would be neglecting our duties to our clients if we did not review our position.  However have we made any material changes to the way we operate, our beliefs, our strategy?  The simple answer is no.

The study, as far as institutional clients is concerned to our mind focussed on 5 main aspects, namely transparency of costs, aggregation of schemes’ assets, active management, the role of fiduciary management, and regulation of investment consultants.  I will set out our hopes on each of these for the final response.

Transparency of Costs

Transparency is a key element for investors to be able to assess whether they are getting what they are paying for.  However, the interaction of annual management charges (AMCs) and transaction costs makes this very difficult.  Any regulation needs to be carefully drafted otherwise it could result in undesirable consequences.  Fixed transactional costs could result in enhanced manager profits in times of low activity and conversely in times of high activity transactions being deferred to protect managers’ profits.  Equally publication of charges could result in higher fees as managers would be reluctant to offer discounts for fear of other clients demanding the same.

The key for our clients is to appreciate what that charge translates to and what service, reports, meetings etc. are covered by that charge.  Equally where fiduciary management has been implemented what that actually means (is it merely aggregation or full fiduciary) and what are the associated charges.

We fully support moves to require greater transparency of costs and hope the FCA encourages this.

Pooling (aggregation) of Scheme Assets

The FCA, as well as the Department of Work and Pensions (DWP), see great attractions for schemes to pool their assets (and liabilities in the case of DWP) foreseeing savings in fees.  The pooling of liabilities is a very complex area not least in relation to the future support of the aggregated scheme and is out of scope here.  On the contrary pooling of assets is already here and practised by JLT.  For schemes with a common sponsor this may be by a common investment fund, but more relevant is the pooling of assets for unconnected employers and schemes.  We provide clients with access to the chosen investment funds and managers simply through a unitised vehicle.  This gives immediate benefit in terms of manager fees as the fees are determined in relation to the size of all the assets held with the manager and secondly gives access to the more esoteric funds for smaller clients where minimum fees may otherwise preclude entry.

Our hope is that the FCA recognises that pooling already exists to the benefit of clients and should be encouraged. 

Active Management

The key decisions are around asset allocation and this drives the returns.  Active management has a place in the strategy and may be an agreed approach. Equally there may be no alternative where there is no passive equivalent available.  It is however unacceptable to pay fees for active management and receive passive (closet tracking) performance.  The focus for the consultant is to select managers to meet specific briefs against specific targets (benchmarks).  The trade off between the additional risks of active management, the additional fees and the anticipated additional returns need to be fully explained and understood.  This is a key fundamental in the advice JLT consultants provide.

Any focus from the FCA for consultants to justify their recommendations in terms of specification of investment briefs, objectives and consistent benchmarking is to be welcomed.

Fiduciary Management

Fiduciary spans the entire spectrum from pure aggregation to a full discretionary and delegated service.  A fully delegated service has great advantages in terms of the reduction in time spent by the client, the efficiency and real time decision making and implementation.  Thereby it is an excellent vehicle for smaller schemes where neither the trustee nor the sponsor has the capacity or expertise for a hands-on approach to investment.  It is not however the approach for all clients.  We discuss with our clients where they wish to participate in investment decision making, the responsibilities and what the costs of the approaches are.  In this context, triggers around a change in strategy and whether this is fully delegated or merely advised for decision making are integral.

To reiterate, it is our philosophy and key that clients understand “what they are signing up for”.  This includes full transparency of costs and what elements (assets strategy, monitoring, performance monitoring etc.) are rolled into the service.

Fiduciary management we believe is the correct route for many DB Schemes because of the advantages it brings.  Clients must however be fully comfortable and we will only offer this service where we are satisfied that they fully understand and buy in to the concept.

The FCA has the opportunity to encourage Fiduciary management.  We expect the FCA to require greater scrutiny of the offerings, recognition of the challenges posed by use of internal funds and the need for greater transparency, greater disclosure of conflicts and comparison against peers.

Regulation of the Investment Consulting Market

This is perhaps the easiest to answer. We passionately believe that our model, beliefs, checks and balances are robust and unlikely to need change to meet any regulatory standards imposed. If it does there will inevitably be additional costs of complying.  We would encourage that any regulation be couched in terms of “what good looks like” so clients can readily see that their consultants are meeting the standards.

We do not expect the FCA to go down the route of regulation.  However were they to do so, we would encourage a principles-based approach built on good practices.

The FCA Asset Management Market study is good for clients.  Change across the industry is necessary and we are ready to play our part to work with regulators, trustees, plan sponsors and advisors to help improve transparency, efficiency and behaviours to attain better outcomes for members.


Phil Wadsworth, Chief Actuary | T: 0161 242 5321 | E:

Whilst all reasonable care has been taken in the preparation of this document no liability is accepted under any circumstances by Jardine Lloyd Thompson for any loss or damage occurring as a result of reliance on any statement, opinion, or any error or omission contained herein.  Any statement or opinion unless otherwise stated should not be construed as independent research and reflects our understanding of current or proposed legislation and regulation which may change without notice.  The content of this document should not be regarded as specific advice in relation to the matters addressed. 

JLT Investment Solutions is a trading name of JLT Benefit Solutions Limited, registered in England No 02240496 and JLT Investment Management Limited, registered in England No 04274915.  Member of the Jardine Lloyd Thompson Group. Authorised and regulated by the Financial Conduct Authority.  Registered Office: The St Botolph Building, 138 Houndsditch, London EC3A 7AW. VAT No. 244 2321 96.