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Business and operational management insights for
multi-manager investors, clients and service providers 

 Newsletter 6

Welcome to the July 2009 newsletter!  As an investor, which would you prefer?

  • an investment that has many conflicts which are clearly understood and well managed, or
  • an investment that has few conflicts which are not well understood and not well managed?
Under the Financial Viewpoint umbrella I have had the benefit of looking at the issue of conflicts within investment consultants in some detail and an analogous question may be more relevant than you may expect.
 
I hope you enjoy the newsletter, and I look forward to your feedback.
 
Best regards
Brett Elvish
Financial Viewpoint
04 1317 6164
brett@financialviewpoint.com.au
 

 

No conflict, no interest:
A viewpoint on investment consulting

“No conflict, no interest” sounds rather sinister and like something that Michael Douglas playing Gordon Gekko in Wall Street would have espoused...”Greed is good”. However, the truth is that we are all conflicted. As soon as you have a job you are conflicted. When was the last time you asked to be paid less money so that shareholders or your members could get a better return!

The extremes of such conflicts around self interest often play out in takeovers...empirically studies show that value is created via takeovers, yet most of the value ends up in the wallets of the shareholders of the company being acquired. However, it is the ego and pay packets of the staff at the acquirer that also swell...self interest at work...nice conflict to think about as we enter a decade of expected industry consolidation! Sorry, diseconomies of scale is not today’s hobby horse...a topic for another time.
 
Conflicts are poorly understood
 
Whilst a director of a company at the forefront of the push into implemented consulting, the issue of conflicts of interest was an ever present question. However, in my experience, the understanding of conflicts was generally superficial and rarely was the right question asked. Yet the consistent questioning effectively forced the business to be vigilant on the issue of conflicts, and create systems and processes for their management.
 
So, two and a half years later and with the benefit of scrutinising the practices of many investment consultants, what do I now think about the issue of conflicts of interest within investment consulting.
 
Some observations
 
Well my first observation is that consistent with my experience on the other side of the fence, I am now more convinced that conflicts are not well understood and the right questions are not being asked. Otherwise the marketing machines would have far more polished responses, and more importantly, better policies and procedures would be in place.
 
My second observation is that there is an inverse correlation between the quantum of conflicts and the quality of their management (sorry just pretending to be an investment consultant). In English, the more conflicts that a consultant has the better they are at understanding and managing those conflicts.  Now that may sound obvious. The more important observation however is that those consultants that have less conflicts need to do more to both understand their conflicts and improve their governance around conflict management.
 
Asking the right questions
 
The most common focus of investors from my experience is on the conflict between investment consulting and implemented consulting.   This question in itself is superficial, and one needs to dig deeper to uncover the real issues.
 
In my view, one of the most important conflicts is associated with the management of scarce investment manager capacity, both on the way in (hiring managers) and the way out (firing managers). And this is a conflict issue for all investment consultants, regardless of whether or not they offer an implemented service. Concentration of market share amongst a small number of consultants is also exacerbating the issues (sorry, back on that other hobby horse again).
 
In brief, the conflicts associated with accessing scarce investment management capacity include:
  • When an investment manager has limited capacity, how is this scarce capacity made available to clients?
  • If a special fee deal is offered for a foundation investor, which clients get to see this opportunity?
  • Is an investment manager with limited capacity researched?
  • How is the downgrading and exit from an investment manager managed when there are multiple client exposures?
These are all important questions that hit more directly at the issue of conflicts and their management, however there are many more conflicts. Click here for some points worth considering...
 
So let’s reconsider the original question: As an investor which would your prefer?
  • an investment CONSULTANT that has many conflicts which are clearly understood and well managed, or
  • an investment CONSULTANT that has few conflicts which are not well understood and not well managed?
Fortunately, consultants do not sit at each end of the spectrum as this question may suggest, and some appear to be listening to the questions I am asking and thinking about their management processes. And there are obviously many considerations in selecting an investment consultant. However, I hope this newsletter helps to provide a broader viewpoint and encourages you to think further about the issues.
 
Summary Viewpoint

When thinking about conflicts, my guidance is to not think narrowly. Conflicts are present in every business, and at many levels. Focus on identification first and then scrutinise their management.  And for every conflict there is at least one benefit. The question is whether you are materially better or worse off due to that conflict, and the answer is not always straight forward.

 

Resources
Financial Viewpoint website
Investment consulting conflict considerations
Broader valuation considerations
Liquidity management policy checklist
Transition manager checklist
Sample client projects

 

Financial Viewpoint

 
Financial Viewpoint provides business and operational management advice, research and tools supporting multi-manager investors, clients and service providers, including:
  • Strategy and governance advice for funds and businesses, including reviews and opportunity identification
  • Advice on management of custodians, transition managers, asset consultants and investment managers
  • Tools, systems and research for better management of businesses and funds
Financial Viewpoint quick links...

 

In the news Minimize
 

Oct '13: How Christian Super makes an impact

Oct '13: Back to front (office) decision making - getting the negotiation "right"

Apr '13: Appointment to ASFA Economics & Investment Policy Council

Apr '13: Appointment to ASFA Investment Standing Advisory Panel

Apr '13: IO&C Shanghai: Front & middle office get involved in custody decisions: Negotiation strategy

Sep '12: ASI: Removing the barriers to investment innovation

Aug '12: Panel: Risk of obsession with peer risk

Mar '12: CMSF media: TAER counterproductive

Mar '12: CMSF 2012: Fees in the superannuation industry

Feb '12: Capability review for Australian equities manager

Jan '12: Industry fund custody review

Nov '11: Retail fund custody fee negotiation advice

Sep '11: Investment consulting market share information

Jun '11: Operational due diligence review for industry super fund

Jun '11: Investment strategy day facilitation for industry super fund

Jun '11: Capability review for unlisted property manager

Apr '11: Investment strategy day facilitation for industry super fund

Mar '11: Capability review for Australian equity manager

Mar '11: Investment manager capability review case study

Feb '11: Conference presentation: Fees in the super industry - A framework for transparency

Dec '10: Christian Super concludes consulting review

Jul '10: ESSSuper concludes consulting review

Jan '10: AvSuper concludes custodian review

Dec '09: I&T article - Transition management

Dec '09 AvSuper custodian review

Nov '09: I&T article: Fee the difference

Oct '09: Christian Super custodian review

Sep '09: Corporate fund custodian review

Sep '09: LGS concludes consulting review

Aug '09: Industry fund consulting review

Jul '09: AvSuper concludes consulting review

Apr '09: SuperFunds article: Transition Mgmt
 

 
Example projects include:
  • Working with board and investment committees on investment beliefs, investment governance, investment models, investment policies, service provider appointments, competitive positioning, delegations and peer risks
  • Working with CEOs, CIOs and COOs on strategy, successor fund transfers, operating models, organisational design, as well as staff mentoring and training
  • Working with teams on investment and operational due diligence (internal and external), service provider management, project implementations, conflict identification and management, and team development
  • Reviews and advice relating to investment consultants, implemented consultants and custodians, along with related due diligence both domestically and internationally
  • Negotiation of arrangements with outsourced service providers including fees, service standards and agreements
  • Specialist work assisting investors reduce foreign exchange costs working closely with FX Transparency
 
 
Investment consulting reviews
 
Investment manager capability reviews

 

Click here for a case study...

 

 
Investment managers
(Australian & international shares, bonds, property) 
  • Target market
  • Product design
  • Pitch material
  • Mock reviews
  • Operational due diligence
  • Investment consulting market
  • After tax returns
  • Fees, including performance fees
 
 
Negotiation strategy & implementation
(fees, service standards, commercial terms, litigation)
  • Retail platform
  • Commercial multi-manager
  • Industry funds
  • Public sector funds
  • Corporate funds
  • Retail fund
  • Covering:
    • Custodians
    • Investment managers
    • Administrators
    • Investment consultants
Strategy off-site facilitation
  • Strategic review of investment positioning
  • Alignment of investment strategy and business (fund) strategy
  • Alignment of internal resources and expertise with areas of greatest impact
  • Alignment of external resources with investment strategy
  • Internal capability self assessment
  • Peer risk sensitivity analysis
 
Investment administration (custody) reviews
Operational due diligence reviews
  • Multi-managers
  • In-house investment managers
  • External investment managers
Industry superannuation fund

Strategic and operational advice to guide the establishment of common infrastructure to support multiple funds, tax structures & investment options:

  • Current operation, competitive landscape and regulatory environment
  • Strategic positioning
  • Investment governance
  • Member entitlements
  • Operating models
  • Custodian review and selection process
  • Asset consultant selection process
  • Unit pricing and taxation
  • Operational transition
Multi-manager and private equity fund

Strategic and operational advice:

  • Business model
  • Target market
  • Product design
  • Investment administration providers
  • Investment systems and infrastructure
  • Operational due diligence framework
  • Investment manager due diligence
  • After tax returns
  • Transition manager panel
Investment platform provider

Implementation efficiency review for an investment platform provider

  • Business model and governance
  • Investment menu
  • Investment manager relationship management
  • Operational implementation models
  • Fee and service re-negotiation
  • Product changes
  • Operational changes
Industry superannuation fund

Project managed the asset transition for a $200 million defined benefit to defined contribution conversion

  • Strategy determination
  • Detailed implementation planning
  • Implementation
  • Post implementation review
Specialist debt investment manager

Strategic and operational advice:

  • Business concept
  • Business model
  • Financial modelling
  • Equity raising
  • Product design
  • Fund raising
  • Target market
Multi-manager

Project manage a $1.5 billion asset transition for a multi-manager and retail investment platform

  • Appointment and termination of over 50 investment managers
  • Trading across multiple markets and asset classes
  • Implementation of new investment strategies
  • Launch of new investment trusts
New market entrant

Strategic advice for an international company considering acquisitions

  • Australian superannuation industry
  • Member administration
  • Key issues and trends
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