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?
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.
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
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