How to build a leading fiduciary business

Fiduciary management is growing. Yet despite this, many asset owners are unable to differentiate between providers. Improving your business’ technical infrastructure and promoting a strong positive culture are the keys to success.

 

Fiduciary management has been a significant growth area in recent years – so much so that the Competition and Markets Authority (CMA) has been asked to review the field. Interest appears set to continue growing. In Aon Hewitt’s 2017 study of fiduciary management for UK DB pension schemes, of the £255bn of assets surveyed, 48% of schemes have a fiduciary mandate (compared to just 18% of schemes seven years prior). Part of this growth has been driven by a high take up among small/medium (<£1bn) schemes debunking the myth that fiduciary management is the sole preserve of larger schemes. Further, the survey points to a further 26% of schemes as willing to explore fiduciary management in the future (with 13% of surveyed schemes not yet having considered it).

 

So why is there increasing demand for fiduciary management? The availability of a wide range of solutions, increased tailoring of products and the general increase in the complexity of investment arrangements, while increasing demand, have all added strain to the already diminishing time faced by trustee boards to govern schemes effectively. Aon’s survey points to 73% of trustees now having less than five hours each quarter to dedicate to investment matters. For the most part, trustees are able to clearly articulate what they are looking for in fiduciary providers (clear processes, proven track records, experience, dedicated teams and the ability to be nimble), but perhaps surprisingly they have difficulty comparing providers – partially explaining the increasing use of independent advisers. KPMG’s 2017 UK fiduciary management survey supports this by pointing to the 60% of new appointments being advised by an independent third party. This suggests the need for fiduciary managers to ‘up their game’ and ensure that their value proposition is clear.

 

Is there a secret sauce?

 

In short, no – organisations need to ensure that they are providing meaningful solutions to their clients based on their own intellectual property. The two key challenges for fiduciaries are:

 

  1. Technology challenge: ensuring the viability of their solutions platforms through scrutinising their physical infrastructure and improving decision-making processes

  2. Culture challenge: building a solutions-based business while preserving/evolving the current business structure requires adaptation of the firm’s overall culture while preserving some sub-cultures.

 

The technology challenge

 

Ensuring that the technology behind solutions platforms – operations, risk/analytics, portfolio management, client engagement etc. – remains competitive is critical for organisations who want to build a strong fiduciary business. Organisations can now draw on a library of technology which uses big data for their competitive advantage. A recent top1000funds.com article cited APG, Europe’s largest investor at €473bn, as developing its business model through the use of artificial intelligence.  Unlike classical economics, technology adheres to the law of increasing returns (see Brian Arthur’s piece on this). Investing more than competitors can define the standard, dominate the market and lead to higher profit margins (think Google). And unlike biological evolution, technology not only builds on previous advances but is also able to combine features that developed separately. This combinatorial layering is key – what businesses develop now to improve solutions will serve as building blocks for the future. Many successful organisations would have seen this layering as a key contributor to the growth of their solutions platforms.  Arthur welcomes us to the distributive era of economics, where production matters less and access to what is produced matters more. Organisations must keep in mind that it’s not just about how good their solutions are – it’s about how readily they can be accessed, fit into clients’ existing needs and, to be sustainable, how these solutions create change for the wider industry. 

 

A side bar: superior technology, investment insights and rigorous analysis do not automatically turn into sound investment decisions without an effectively organised and well executed decision-making process. In a low return environment and with the continued shift to passive investment, solutions based organisations can gain a competitive edge by harnessing the value of better decision-making processes and counteracting biases – a productive partnership between human and machine intelligence can help to do this.

 

The culture challenge

 

Roger Urwin, Willis Towers Watson’s global head of investment content notes that culture is a unique and highly influential ingredient in the recipe for competitive advantage among investment firms. It can be assessed, codified and developed over time. Culture can influence the amount of value an organisation creates through improving (i) the client value proposition (policies that deliver value to clients) and (ii) the employee value proposition (policies that attract, retain and develop talent).

 

The consulting and asset management models each bring different competencies and cultural features to the fiduciary management approach. Investment consulting supports clients as they address their investment problems and asset management provides components that clients can use to address their investment problems. An effective fiduciary management firm not only needs competencies to (i) understand the client’s investment problem and (ii) provide a complete solution to the problem; but also a culture that supports excellence in both of these dimensions. This requires the combination of three areas of culture:

 

  1. Client centricity: listening/empathy, trust, solutions integrity

  2. Investment focus: accountability for outcomes, resilience to performance noise, awareness of value for money solutions, respect for investment skills

  3. Team approach: client relationships require unique skills which are developed through respect, trust and reliance between colleagues.

 

People are investment firms’ single strongest dependency in delivering culture and implementing technological solutions. This points to the need for organisations to train and recruit T-shaped professionals (that is, those with both breadth and depth) who are machine friendly, adaptable and have the technical skillset to navigate our industry’s complexities. And we need a culture of fairness. A short-term results-only culture easily converts to a blame culture; narrative is important. Organisations need to work harder to better attribute performance and show how results contribute to clients’ value add. 

 

These attributes should help clients better differentiate between investment solutions providers.