Elaine O’Keefe explains the benefits of ‘unbundling’ for your pension
Bundled Products: Investment and pensions are complex areas
Investment and pensions are complex areas, or so the industry would like us to believe. For those searching for providers for their employee’s pension scheme, the choices out there can seem overwhelming and confusing. It is unsurprising then, that many companies eventually choose a “bundled” solution for their employee pension scheme. However, at Acuvest, we are increasingly convinced that bundled solutions have significant flaws and that “unbundled” solutions result in better scheme management and better outcomes for members.
What is “bundling”?
When we talk about bundling in relation to the management of a pension scheme’s assets, we are referring to the practice of one provider selling all parts of an investment solution to their clients. This means that the same firm will provide advice, scheme design, tactical asset allocation, fund management, administration services etc.
A bundled solution has one major selling point; convenience for the client. Instead of choosing several different providers, the Trustee Board needs only to choose one provider who will then take care of all aspects of the investment management.
What is the problem with bundled offerings?
There three major issues with the idea of bundling that cause us at Acuvest to feel uneasy:
1. Opaque Pricing
Bundled solutions are generally offered for an overall, headline fee. This will either be a flat annual fee, or, more commonly, it will be a percentage of total scheme assets. The amount being paid for each individual service is generally not known and usually cannot be broken down by the service provider. Although it could logically be argued that there should be cost savings due to the economies of scale gained by using a single provider, in our experience, by using separate providers for various aspects of the Scheme management, we have actually been able to obtain lower overall fees. Additionally, by using separate providers, all fees are transparent and value for money can be more easily assessed.
2. Conflict of Interest
When one firm provides both advice and fund solutions, there is a clear incentive to recommend internal products. There is also a disincentive to fire internal managers if they are not performing well. In this arrangement, the advisor is sitting on the same side of the table as the fund managers, rather than sitting with the Trustee Board, they are unlikely to make any recommendations that will result in the loss of assets under management for their own firm.
3. Lack of Specialisation
Although one provider could potentially be the best at every aspect of scheme management, this is unlikely to be the case. A bundled solution generally uses just one provider, restricting or completely prohibiting access to third party managers. This means potentially missing out on interesting, niche or specialist offerings from other managers.
What is the alternative?
Separating advice from fund management is important. Having an independent advisor ensures that the advisor is working in the best interest of Trustee Boards, and, ultimately, pension scheme members. There is no incentive to sell internal products; an independent advisor can simply recommend the fund manager(s) or other providers that they think will best serve the client.
Unbundling can go further, for example the separation of asset allocation decisions from fund management. In this instance, the firm providing tactical asset allocation calls (the “asset allocator”) is not allowed to allocate any assets to their own products. Instead, they must instruct another firm (the “platform provider”) to make asset allocation changes. The platform provider provides access to various funds, including funds managed by third parties.
Acuvest has implemented this solution with one of our clients in 2016. We found that the skillset involved in making asset allocation calls was very different from that involved in providing an efficient and low cost investment platform. Rather than ask one provider to perform both functions, we decided to use a specialist in each area and ask them to work together. Additionally, the separation of these functions ensures that if either of the providers does not perform according to expectations, they can be replaced while still retaining the services of the other provider.
Having an unbundled solution for your pension scheme undoubtedly requires more involvement and oversight from the Trustee Board. However, it is not as daunting as it first seems. Once the right governance structure is put in place, the decision making process becomes very straightforward.
Elaine O’Keefe is an Investment Analyst at Acuvest. Email Elaine at ElaineOK@acuvest.ie. Acuvest is an independent pensions and advisory management business taking care of the futures of over 40,000 of our clients’ employees. For more market analysis and expertise follow Acuvest’s daily updates on Twitter @AcuvestIreland and LinkedIn and our fortnightly blogs.