Edition 23 M a r c h 2 018
How no-bid investment management contracts are blocking transparency in America
Secret no-bid contracts
How a court ruling could change the fortunes of fund rebates P13 Winds of change are blowing through the Dutch pension system Aligning the interest of investors and their advisers in American financial services
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3 Hello from the Editor 4 The Transparency Task Force Teams 6 Secret no-bid contracts 11 The lang cat view 12 Countervailing power in Dutch pension transition 14 Transparency Statements 15 Sales pitch or sound advice? 18 The Directory of Pro-Transparency Organisations
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Hello from the Editor The mission of the Transparency Task Force is to “help fix financial services by harnessing the transformational power of transparency”. In an effort to do that we have, despite a chronic lack of resource: • Published 22 editions of the Transparency Times, which goes to 12,000 people. • Run 18 Transparency Symposia – 16 in the UK, 1 in Boston, 1 in The Hague. • Awarded 17 Transparency Trophies. • Held three special meetings at the House of Commons. • Formally responded to eight regulatory/industry consultations. • Had dozens of meetings and calls with regulators and Government officials. • Produced three Thought Leadership White Papers. • Gathered over 100 Transparency Statements. • Had hundreds of articles/ comments published, including a piece on the FT’s front page. • Been on BBC Radio 4 three times. • Spoken at dozens of conferences and events. • Recruited 31 Ambassadors. • Developed a growing presence in 18 countries.
Andy Agathangelou Founding Chair, Transparency Task Force
• Attracted over 300 volunteers, who are organised and mobilised into 13 Teams.
to drive change – such as the chief executives of all market participants and their trade bodies.
A very recent breakthrough is the financial support we are now starting to receive from market participants including asset managers and consultancies. While this financial support is in itself of enormous value, I believe it is even more significant as an endorsement of what the Transparency Task Force is all about. In particular, it shows that the Transparency Task Force is not an enemy of the financial services industry – nothing could be further from the truth.
Moving forward, it must make sense for those that lead to do so by putting the interests of the end-client first and foremost; only by doing that will they truly serve the interests of their shareholders/members, because a mind-set of ‘profit before principle’ cannot lead to sustainable profit in a transparent market; and we are getting closer and closer every month to a transparent market.
I make that point because helping to fix financial services through harnessing the transformational power of transparency will speed up much-needed reform across the sector. It will also help to repair the reputational damage the sector has suffered. Furthermore, it will help to bring about the cultural transfusion that needs to happen within the industry, particularly at the top. That last point is particularly important to me because I think nothing will have a more positive impact on the financial services sector (and ultimately its clients) than more enlightened, values-based leadership from those in a very strong position
Enormous strides are being made in the UK and I would like to think that the Transparency Task Force has played a small role in that. The extent to which that is the case I don’t know, but I am absolutely sure that the more established organisations such as ShareAction, Better Finance and the True and Fair Campaign have had an enormous impact, as well as wonderful contributions by the likes of Dr. Chris Sier, David Pitt-Watson, Henry Tapper, Con Keating and Dan Norman. We can’t change the past, but the future is ours to create, collectively. Let’s go about that in a collegiate, collaborative and cooperative way because if we all want what is ultimately good for us, we’re all on the same side.
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The Transparency Task Force Teams The teams are the Transparency Task Force’s collective response to what we see across the global financial services industry that needs to change. We firmly believe that those who can see problems, admit to them and are motivated to tackle them should collaborate to put things right. It’s in everyone’s interest to do so. The Transparency Task Force teams are less about individual experience and more about understanding the potential power of working together to drive much needed change.
Improving transparency and professionalism.
Challenging the opacity.
Championing ethical practices.
Costs and Charges
Helping investors access better value for money.
Focusing on issues jeopardising the success of auto enrolment.
Scams and Scandals
Raising awareness to help shut them down.
Global Transparency Index
Mutual learning to inform the Global Transparency Index.
Purpose, Impact Investing, Sustainability, CSR, ESG and SRI.
Progressive asset managers working together.
Working to mitigate the risk of another Global Financial Crisis.
Promoting transparency in the Asia Pacific area.
Promoting transparency in Europe, the Middle East and Africa.
Promoting transparency in North and South America.
If you want to make your opinion count by joining our 300+ strong group of volunteer team members, contact firstname.lastname@example.org for more information and details of the monthly conference calls.
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The Transparency Task Force Ambassadors While we value every member of our campaigning community, some go over and above. They are particularly aligned to our cause and, as such, are profoundly impactful for positive change. They are our Transparency Task Force Ambassadors.
The Wealth Game
Director of Manager Research Services EMEA
Morningstar Europe Ltd
Consulting Chief Investment Officer/UK Lead
New Fund Order Consulting/ Association of Professional Fund Investors
Values Based Adviser
Associate Director and Senior Fellow
Harvard Law School Programs on Corporate Governance and Institutional Investors
Institute for Financial Transparency
Head of Research
Big Issue Fund Management
Co-Founder and Chairperson
Conscious Capitalism Boston Chapter
Head of Research
Kinder Institute of Life Planning
Partner and Head of the Netherlands
Interim Chief Risk Officer
USA – New York
Philip Meadowcroft Independent Shareholder Activist NA
USA – Boston Canada USA – Boston UK Australia
USA – Boston Australia Netherlands
Centre for Business Ethics and Corporate Governance
President – North America
London Business School
Ember Regis Group
Professor of Law and Director, Labor and Employment Law Program
Marquette University Law School
Kara Tan Bhala
President and Founder
Seven Pillars Institute for Global Finance and Ethics
USA – Kansas
Lecturer in Startegy and Corporate Governance
Newcastle University Business School
Stable Value Consultants
Founder and Managing Director Institutional Benchmarking Institute
Senior Policy Advisor
The Federation of Dutch Pension Funds
USA – Washington USA – Boston
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Secret no-bid contracts BY CHRIS TOBE CFA | FOUNDER OF STABLE VALUE CONSULTANTS
This article is based on an excerpt from his new book, Kentucky Fried Pensions.
Hundreds of contracts for investment managers at large US public pension plans are kept secret. They are too secret for trustees to see, they are too secret for legislators to see, and they are even too secret for the State Auditor to see. They are exempted from Federal Pension law (ERSIA) so must rely on state oversight. Most of these secret contracts are also exempt from competitive bidding. The majority of investment fund providers in US public pensions are now hired in secret no-bid contracts.
The original 2016 version of Kentucky’s Senate Bill 2, sponsored by Senator Joe Bowen (SB 2), sought to require competitive bidding on contracts. However, the late December 2016 PFM Consultant report commissioned by the Governor said that competitive
bidding was not a good idea.1 In early 2017 the HuffPost reported that “Measures to require full fee disclosure and competitive bidding were noticeably absent from this year’s version of SB 2, and an amendment to reinsert them was defeated on the House floor”. How the two stronger provisions disappeared from the bill “is a mystery,” said state Rep. Jim Wayne (D), who has for years fought for pension reforms”.2 SB 2 was hailed as a great accomplishment of the 2017 KY General Assembly, even though it was stripped of its most important language. These investment management contracts are typically not reviewed by the boards or investment committee. Instead, they receive rubber stamp approvals without any significant review or oversight.
ttps://pensions.ky.gov/Documents/2016%2012%2030%20 h -%20KY%20Interim%20Report%201%2012-30-16%20-%20 Transparency%20and%20Governance.pdf
In the rare cases that these contracts are open to the public they are usually heavily redacted. I believe what is redacted is not ‘trade secrets’ but violations of state fiduciary law, such as the ability to breach fiduciary duty, charge excessive fees and expenses, and to flow the assets through the Cayman Islands and other offshore spots. I gave the financial transparency site Naked Capitalism 10 Kentucky (KRS) current private equity contracts that I got from the SEC (Securities and Exchange Commission) investigation, which are not redacted.3 These include contracts from Blackstone Oak Hill Capital Partners III, & Vista Equity. KRS was so infuriated by these disclosed secret contracts that in July 2017, a KRS staff attorney threatened the site with legal action.4 Naked Capitalism (NC) said in a very detailed response that “Kentucky Retirement Systems’ in-house lawyer is threatening us with all sorts of unnamed horrors if we didn’t take down limited partnership agreements that came from them super pronto”.5 NC went on to ridicule KRS as “the most corrupt and the most incompetent public pension fund in the US”.6 In March 2017 NC published some secret KRS contracts, pointing out how they failed fiduciary standards by allowing language that “provided indemnification for criminal acts”.7 In this article on criminal acts they specifically cited secret Kentucky contracts they
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A 2014 expose by David Sirota on KRS and its largest vendor, Blackstone, had this to say about their secret contracts: “Blackstone’s payment structure is outlined, with language guaranteeing that Blackstone will receive its hefty annual management fees from the taxpayer – regardless of the fund’s performance. In other documents, public pension money is exempted from some of the most basic protections usually guaranteed under federal law. Other contract language appears to license Blackstone to engage in financial conflicts of interests that could harm investors”8. Language like “Blackstone may have conflicting loyalties” between the different funds it operates, and that “actions may be taken for the other Blackstone funds that are adverse to investors.”9 seems to conflict with state fiduciary law, which is the crux of the ongoing Ft. Wright lawsuit in Franklin Circuit Court.10
The KRS/Blackstone contracts have a troubling section entitled “absence of regulatory oversight”. This section includes clauses like investors “are not afforded the protections of the 1940 (Investment Advisers) Act”. It also says that in the event of litigation brought against the managers of the fund, those costs “would be payable from the assets” of the investors12. Sirota quotes former SEC investigator Ted Siedle as noting that the conflict-of-interest section marked “Fees for Services” is particularly problematic. Siedle says it permits private equity managers to assess fees on companies the private equity fund owns, but then not compensate the fund investors (like public pensions) for those fees. This stealth fee-inflating practice, which is attracting SEC scrutiny, has been called the “crack cocaine of the private equity industry”13. Blackstone CEO Steve Schwartzman gave Kentucky U.S. Senator McConnell $2.2 million in 201614 and has 27 lobbyists in Frankfort.15
While stocks and bonds can go down in value, they have limited liability i.e. they cannot go below zero or send you a bill. However, Sirota points to particular language in the KRS Blackstone contracts that allows investments to go below zero, subject to “certain additional potential liabilities” and that an investor “may be required to make capital contributions in excess” of what it originally pledged”.11
KRS is not the only one with secret contracts. The Kentucky Teachers Retirement System plan has them as well in its private equity investments. Forbes has commended Dr. Randy Wieck, a Louisville Manual high school history classroom teacher with a degree from the London School of Economics, for single-handedly taking on the titans of private equity and their secret contracts.16 The San Francisco Chronicle ran
obtained on Blackstone & Oak Hill private equity funds.
3. Naked Capitalism July 2017 Susan Webber http://www.nakedcapitalism. com/2017/07/bumbling-kentucky-retirement-systems-threatens-nakedcapitalism-with-half-cocked-nastygram-that-will-only-alienate-privateequity-fund-managers.html
10. http://wfpl.org/kentucky-city-sues-state-pension-system-over-riskyinvestments/#.U45wb1Fdy2c.twitter 11. 12. 13. Pando May 2014
4. 5. 6. 7. Naked Capitalism July 2017
14. http://www.huffingtonpost.com/entry/mitch-mcconnell-super-pac_ us_5849eb76e4b0bd9c3dfc03cd
8. Pando May 2014 David Sirota https://pando.com/2014/05/05/leakeddocs-obtained-by-pando-show-how-a-wall-street-giant-is-guaranteedhuge-fees-from-taxpayers-on-risky-pension-investments/
15. h ttps://ethics.ky.gov/SiteCollectionDocuments/lobbying/ EALListingByEmployerAndParty.pdf
Pando May 2014
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a piece on Wieck that said: “If you are a public-school teacher in Kentucky, the state has a message for you: You have no right to know the details of the investments being made with your retirement savings.”17 Bloomberg reported that “Kentucky high school history teacher Randy Wieck is on a lonely mission to discover the whereabouts of the 12% of each paycheck he and 74,800 other educators are putting into a state pension fund. He’s especially keen to unearth details on the $1.1 billion the badly underfunded Kentucky Teachers’ Retirement System has committed to private equity and hedge funds. The quest pits Wieck against billionaire fund managers, a white-shoe law firm, state pension officials, and even his own union. “It’s my money and taxpayer dollars they’re skimming,” he says. “And they refuse to say how much they’re charging”.18 Secret no-bid contracts are making Wall Street firms like Blackstone and KKR millions in excess fees. They have much incentive to kill legislation that threatens the secrecy of these contracts. In his North Carolina report, former SEC
attorney Siedle makes a mockery out of the industry claim that they are protecting ‘trade secrets’ like the Colonel Sanders secret recipe for chicken: “Perhaps most disturbing, in response to our specific requests, the Treasurer refused to disclose offering memorandum and other key documents (including information regarding millions in placement agent fees) related to TSERS’ costly, high-risk alternative investments, citing supposed “trade secret” concerns raised by the alternative managers. Viewed from a regulatory and public policy perspective, the Treasurer’s practice of withholding relevant information and intentionally providing incomplete or inaccurate disclosures regarding TSERS investments results in: (1) concealing potential violations of state and federal laws, such as those detailed throughout this
report; (2) misleading the public as to fundamental investment matters, such as the true costs, risks, practices and investment performance related to hedge, private equity, venture and real estate alternative investment funds; (3) understating the costs and risks related to TSERS investments specifically; (4) misrepresenting the investment performance and financial condition of the state pension to investors in state obligations.”19 Siedle dug into the documents further: “The documents we reviewed indicate the alternatives are high-risk, speculative investments; the funds’ investments are highly illiquid subject to enormous valuation uncertainty; the offerings involve serious conflicts of interest regarding valuation of portfolios by the managers themselves and calculations of fees, as well as opportunities for self-dealing between the funds, the managing partners and their affiliates that may, in our opinion, violate state and federal law.”20 It is fairly obvious, then, that contracts are kept secret in order to help hedge fund managers and private equity conceal their fiduciary breaches and excessive fees.
19. North Carolina Pension’s Secretive Alternative Investment Gamble: A Sole Fiduciary’s Failed “Experiment” By Edward Siedle
18. h ttp://www.bloomberg.com/news/articles/2015-03-23/7-ways-privateequity-is-gaming-your-pension
20. North Carolina Pension’s Siedle
Chris Tobe, CFA, CAIA is a top expert on DC investing and stable value and is the founder of Stable Value Consultants. He provided written testimony on stable value to DOL’s ERISA advisory committee and testified in person at the joint SEC-DOL hearing on target date funds in summer of 2009. He has over 25 years of experience working with DC plans working as a consultant, money manager and regulator. He was a Trustee for the Kentucky Retirement Systems and served as a Sr. Consultant for BCAP and NEPC. He holds a BA in Economics from Tulane University, and an MBA in Finance from Indiana University – Bloomington.
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Time for Transparency – THE FUTURE OF ASSET MANAGEMENT Tuesday 24 April 2018 Orbis Investments, 28 Dorset Square, London NW1 6QG 10:45 for an 11:15 start, ending at 17:00 with networking over drinks and nibbles until 18:30 This Transparency Symposium is an important thought leadership event wholly dedicated to discussing and debating the future of the asset management industry. There is so much change happening within asset management at the moment and it is important to take stock of what is going on. This event is an opportunity to pause for thought and reflect, reconsider and refocus on what it may all mean at an industry, organisational and individual level. We’ll be taking a very close look at the forces driving change in the sector and how those forces are shaping its future. The symposium will feature input from a truly first class line-up of participants, including senior representatives from the Financial Conduct Authority and The Pensions Regulator, plus internationallyrecognised thought leaders. The event will seek to answer the underlying question: “What will the asset management industry look like five years from now, and why?”
Key panel participants include: • Mary Starks, Director of Competition and Chief Economist, The Financial Conduct Authority • Neil Esslemont, Head of Industry Liaison, The Pensions Regulator • Andrew Clare, Professor of Asset Management, Cass Business School • Catherine Howarth, Chief Executive, ShareAction and Member of HM Treasury’s Taskforce on Asset Management • Will Goodhart, Chief Executive, CFA Society of the UK • Daniel Godfrey, Non-Executive Director of Big Issue Invest Fund Management and Digital Moneybox, a member of Legal & General’s Independent Governance Committee and a member of the Advisory Board of the Ethical Capitalism Group • Guy Spier, Chief Executive Officer, Aquamarine Capital • Chris Mills, Digital Asset Management and Financial Services Automation expert; Managing Partner at Fimatix • Jon Willis, Commercial Director, Calastone • Andrew Mills, Director, Insight Financial Research • Dan Brocklebank, Head of UK, Orbis Investments • Leon Kamhi, Head of Responsibility at Hermes Investment Management • Val Lie, Founder, Borg Consulting Other names are being added.
Places are limited and demand is expected to be high. Click on the link below for full details and get in touch through email@example.com if you genuinely need an adjustment on the price of £245 per attendee.
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Venues wanted for events in all of these locations
Amsterdam, Auckland, Beijing, Berlin, Boston, Brussels, Cape Town, Chicago, Dubai, Dublin, Frankfurt, Geneva, Hong Kong, Johannesburg, London, Los Angeles, Melbourne, Montreal, New York, Ontario, Paris, San Francisco, Santa Monica, Shanghai, Singapore, Sydney, The Hague, Tokyo, Toronto, Vancouver, Washington D.C. and Zurich. For further information please get in touch through firstname.lastname@example.org
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Is the shine coming off superclean funds? It’s been a bit of a year for pensions and asset managers already, so for this to potentially be one of the most significant events this year, it must be quite something. And it is. Hargreaves Lansdown took HMRC to court, arguing that it was wrong to treat fund rebates as taxable (as it has been doing since 2013 where they are held outside of an ISA or pension) and won. Fans of platforms will be up to speed on the difference between rebates and superclean share classes but, for those who have a life, here’s a quick reminder. Before the RDR came along and spoiled everyone’s fun, some platform providers received some or even all of their revenue via fund rebates. Along with trail commission for the adviser, and the fund group’s cut, this revenue was buried in the fund charge paid by the client to the fund group, so wasn’t exactly suited to the transparent post-RDR world. Explicit advice fees were followed by a ban on platforms retaining rebates for new and existing business. Any rebates had to be passed directly to the client in full. That was all well and good until those nice people at HMRC decided that for assets held outside of a tax wrapper, these rebates should be treated as annual payments for tax purposes. Platforms were forced to deduct basic rate tax at source, with investors expected to declare any additional higher rate liability on their tax returns. Which I’m sure everyone did.
While the FCA has frequently stated that it considers the role of platform providers to include negotiating with fund groups to lower the costs of investing, the preferred method of discounting (rebates) had suddenly become rather less alluring. A solution of sorts appeared in the form of superclean share classes which, rather than paying the discount to the client via a rebate, have a lower ongoing charge, negotiated for clients by the provider. But superclean has its own drawbacks. First, it’s another shareclass for asset managers and providers to administer, increasing complexity for advisers and clients alike. And secondly, it creates a barrier to exit. Moving superclean investments from one provider to another without incurring cost and/or time out of the market can be somewhere between difficult and impossible. On the face of it this announcement suddenly makes rebates more attractive, which is good news for all market participants: fewer share classes for fund managers to administer and greater
flexibility over discounts for different distributors; platforms too will have fewer share classes to administer, simplifying their offerings and operations; advisers will breathe a sigh of relief at a common share class being used across all platforms and, most importantly, clients can benefit from a lower cost of investing without barriers to exit or tax liability. HMRC is entitled to appeal the ruling but, even if it doesn’t, things won’t change overnight. Some platform providers cannot process rebates so will be stuck using superclean discounts until the required functionality is built. It will however, be interesting to see how platforms and asset managers react to this ruling, especially with the current FCA expectation for platforms to use their scale to reduce investment costs. This ruling makes it easier to do exactly that and in a manner that enables the best outcome for clients. Hargreaves Lansdown should be applauded for launching and, as it stands, winning this challenge.
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Countervailing power in Dutch pension transition JASPER HAAK | MANAGING PARTNER AND CO-FOUNDER OF AF ADVISORS
The Dutch pension system may be heralded as one of the best in the world, but change is in the air even there. The 2017 Melbourne Mercer Global Index awarded the Netherlands second place among all the pension systems in the world, albeit while identifying some room for improvement. The Dutch pension system combines a flat rate public pension with occupational pension schemes. Traditionally the majority of these occupational pension schemes have been company or (mandatory) industry-wide defined benefit (DB) plans. It’s said that “if it ain’t broke, don’t fix it”, but times are changing in Dutch pensions.
The 2017 Melbourne Mercer Global Index awarded the Netherlands second place among all the pension systems in the world, albeit while identifying some room for improvement.
Over recent years the global trend towards defined contribution (DC) pensions has extended to the Netherlands. Many companies not bound by mandatory industry-wide pension systems have elected to use individual DC plans for their employees. A perfect storm of arguments in favour of change included successful lobbying by some of the largest Dutch companies, led by Shell; fear of the sustainability issues created by low interest rates; and
political discussions around intergenerational risk sharing. This resulted in an environment conducive to change in the Dutch pension system. It’s estimated that as of the end of 2017, It’s estimated that as of just 5% of Dutch the end of 2017, just 5% of pensions were part of Dutch pensions were part individual DC plans. This percentage of individual DC plans. is expected to grow over the next decade as more companies adopt individual DC arrangements. The new Dutch government stated in its 2017 government agreement that it would work towards a new pension system containing many of the characteristics of individual defined contribution plans, albeit with a collective component that is currently being designed by working groups and committees. The transition towards individual DC will be slow in terms of pension assets however, as it is not expected that existing DB pension schemes will be transferred. This change will require a rethink of pension governance. Existing collective DB pension funds are among the largest pension funds in the world. These pension funds are non-profit organisations that can afford a professional board of the pension fund, that will be advised by a variety of experts on pension and investment matters. An SME company in an industry that has a mandatory industry scheme therefore takes advantage of economies of scale in pension governance. If the same SME company is able to choose an individual DC plan it has no access to the same pension
AF Advisers, an investment management consultancy and LNBB, an actuarial consultancy, joined forces in 2015 to bridge this gap in pension governance and to help pension advisers analyse and compare individual DC plans. The â€˜Penformanceâ€™ tool was developed and offered at cost to Dutch pension advisers. Smaller
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Dutch regulators. While duty of care regulation has recently been strengthened, regulation is not sufficient as it is primarily focused on preventing excesses. Empowered pension advisers can provide continuous feedback to the commercial organisations offering individual DC plans, while basic insight into the strengths and weaknesses of the offered plans prevents a selection focus solely on the visible costs of these plans.
governance. Individual DC plans are typically offered by commercial organisations. In the Netherlands, twelve financial institutions currently offer individual DC plans, all of them for-profit organisations including banks, insurers and pension platforms. The only means of countervailing power in the new pension system are pension advisers. Until 2013 most of these pension advisers were paid by those companies offering pension plans. A 2013 ban on commissions on pension plans (amongst other products) ended this iniquitous relationship and resulted in truly independent pension advisers. However, this favourable development did not come without a disadvantage. Many SMEs could not or did not want to pay for independent pension advice and the pension advisers largely did not have the scale or expertise to analyse and compare individual DC plans.
pension advisers typically lack the expertise to analyse the life cycles, asset allocations and fund selections of individual DC plans. Properly analysing these individual plans requires gathering large sets of data, sophisticated scenario analysis and intimate knowledge of investments and investment funds. Using the Penformance tool to do standardised or tailored comparisons of individual DC plans allows a pension adviser to exert the countervailing power. This countervailing power is vital in retaining the status of a global best-in-class pension system. Without a healthy pension advisory sector, the only sources of countervailing power are the
Use of the Penformance tool has resulted in more sophisticated asset allocation, an improvement of life cycle paths and improvements in cost transparency.
Use of the Penformance tool has resulted in more sophisticated asset allocation, an improvement of life cycle paths and improvements in cost transparency. While there is still room for improvements, the majority of individual DC plans consist of good financial products with better value for money than the private banking products typically offered only to high-networth individuals.
Jasper Haak is a managing partner and one of the founders of AF Advisors (2008). He previously worked for the asset manager Robeco in roles including product management and strategic development. He holds a MBA from London Business School and is a Chartered Alternative Investment Analyst (CAIA) and GARP certified Financial Risk Manager (FRM). AF Advisors is a leading boutique consultancy specifically focused on the asset management industry that combines deep industry knowledge and expertise with a practical, multi-disciplinary approach. AF Advisors supports clients in the areas of investment structuring, product management, operations, regulatory implementation and organisational consulting.
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Transparency Statements Transparency statements are a great way for individuals and organisations to show support for our international campaign for improved transparency in financial services. We believe that higher levels of transparency are a pre-requisite for fairer, safer, more stable and more efficient markets that deliver better value for money and better outcomes for consumers. Transparency breeds trust. By fostering greater transparency across financial services, together we can positively impact the reputation of the market as a whole. Which is good for everyone. You can add your transparency statement by completing this sentence: ‘I believe there ought to be higher levels of transparency in financial services because…’ and sending it to email@example.com
Here are some examples from thought leaders showing their support. Paul Brown
Group Director, Blacktower Financial Management
Vice President, PA Group
“I believe there ought to be higher levels of transparency in financial services because the work we do is essential and we need to rebuild the public’s trust in our industry.”
Ben Montilla Paralegal (Pensions Law Team), Eversheds Sutherland
“I believe there ought to be higher levels of transparency in financial services because it assists customers, clients and financial services professionals to understand and use the services on offer to their maximum potential.”
“I believe there ought to be higher levels of transparency in financial services because everyone deserves to benefit from good advice.”
Jeroen Spangenberg Journalist, The Holland Times
“I believe there ought to be higher levels of transparency in financial services because it takes away the conflict of interest between broker and client.”
Simon Wasserman Project Director (Pensions), Financial Reporting Council
“I believe there ought to be higher levels of transparency in financial services because asymmetry of knowledge and understanding is the basis of unfair terms of trade.”
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Sales pitch or sound advice? JOHN SPOTO | PRESIDENT AND FOUNDER OF SENTRY FINANCIAL PLANNING
Individuals trying to plan, save and invest for their futures are increasingly seeking out professional advice. Finding it isnâ€™t always easy, however. Many are forced to search through over 200 financial services designations with wideranging educational standards, legal obligations to clients, and compensation arrangements just to find the right help.
A 2008 landmark study by the RAND Corporation concluded that although retail investors felt they understood the difference in services offered by various financial industry representatives, the reality was that most had no idea. Angela Hung, the studyâ€™s lead author, a RAND economist with a Ph.D. from Caltech, remarked that even she found it difficult to disentangle the titles, services and business relationships of most of the industry participants. It is no surprise, then,
that the typical consumer finds it nearly impossible. Trusting but misinformed investors are often under the illusion that those who call themselves financial advisers, financial planners or a host of other titles all have a uniform legal duty to make recommendations and act in the best interests of their client. This misconception has costly implications for their economic security.
In basic terms, there are two very different legal systems governing US financial services organisations and their representatives. There is one set of laws for those who sell financial and insurance products for commission on behalf of their employers (e.g. brokerages, banks, fund companies, insurers, etc.). These reps are commonly known as brokers or registered representatives. The other set of laws is for those who do not sell products but rather offer advisory
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services with a pre-determined fee schedule on a wide variety of financial planning areas including investments. This second group is known as Registered Investment Advisers (RIAs).
Brokers are contractually obligated to place the interests of their employer ahead of their clients. US brokers are governed by the Securities and Exchange Commission (SEC) under the Securities Exchange Act of 1934 and are self-regulated by an industry body known as the Financial Industry Regulatory Association (FINRA). Brokers are contractually obligated to place the interests of their employer ahead of their clients. Their limiting guideline is a “suitability” standard, which requires that whoever is handling a customer’s investments must recommend products that are suitable for their objectives, financial means and personal circumstances.
RIAs are subject to a higher standard of care than brokers. They are legally obligated to a “fiduciary” standard, which means they must place the interests of their clients above all others including their own. RIAs are governed under the Investment Advisers Act of 1940. The SEC is responsible for overseeing those who manage assets of $100 million or more, while state securities divisions
regulate those who manage less. RIAs are subject to a higher standard of care than brokers. They are legally obligated to a “fiduciary” standard, which means they must place the interests of their clients above all others including their own. It was common knowledge among industry participants and observers even before the RAND study was published, that, to their detriment, consumers conducted little due diligence when seeking financial advice. However, the recent explosion of complex investment and insurance products has been accompanied by an industry transformation. Organisations and their agents are intentionally blurring the lines between a salesman/broker/insurance agent and RIA by using confusing titles. Specifically, individuals who are de facto commissioned sales reps and who are not held to a fiduciary standard are increasingly calling themselves financial advisers or investment advisers; titles that were previously reserved only for those who operated in a fiduciary capacity under the law. This strategy exploits shortcomings in the regulations to take advantage of client confusion, making it more difficult than ever for the average investor to find unbiased advice. Objective industry experts have long argued that while in theory both suitability and fiduciary standards limit selfserving behavior, in practice the suitability standard provides such wide latitude for brokers’ recommendations that it is meaningless in protecting the consumer. After all, this is the same standard that introduced complex, conflict-ridden, commission-laden products including non-traded real estate investments and variable annuities to the investing public.
Under the guise of suitability, sales reps regularly recommend investments that generate the fattest margins for their employers and the biggest commissions for themselves, even if other investments might offer the client lower costs and better returns. In other words, in order to meet their minimum obligation the recommended investment is merely required to be “suitable,” not necessarily the best for the client. That distinction could make a big difference in your bank account. Imagine that you are investing $100,000 in a stock fund toward your retirement. A broker operating under the suitability standard recommends a fairly typical fund (we’ll call it Fund A) that pays a commission of 3% upfront, has an annual expense ratio of 1% and additional undisclosed fund turnover expenses of 1%. An RIA operating under the fiduciary standard, on the other hand, offers an almost identical fund (call it Fund B) except there are no sales commissions, the annual expenses are 0.2% and fund turnover costs add another 0.2%. Assuming both funds earn an average annual return of 7% over a 25year period, Fund A accumulates $318,000 compared to $491,000 in Fund B. Taking 100% of the investment risk while forfeiting over $170,000 in investment returns is not something that any informed investor would accept. In the above scenario, a ‘fiduciary standard’ would prohibit an adviser from recommending Fund A. Things get dramatically worse for investors (and better for brokers) when we leave the relatively transparent and competitive realm of mutual funds and move into the arcane world of nontraded real estate investments,
private partnerships, variable annuities, and other financially engineered products. While some of the country’s most distinguished economists and investment experts have warned that these products have no place in an investor’s portfolio, analysts estimate that the annual transfer of wealth from consumers to sales reps and their companies from these products has reached into the tens of billions of dollars. The rise in questionable sales tactics and the various other abuses perpetrated by financial industry participants against unsophisticated retail clients have attracted the attention of regulators and consumer advocates. Among the most important objectives of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank) was the establishment of robust new fiduciary standards for the brokerdealer industry. Under that law, the SEC was mandated to study the effectiveness of the existing standards of care in protecting investors and propose solutions where warranted. In early 2011, the SEC delivered its Study on investment advisers and brokerdealers, which recommended that the Commission replace the current
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disjointed regulatory scheme with a new uniform fiduciary responsibility for both brokerdealers and investment advisers. Not surprisingly, seeing billions in profits at risk, the pushback from the industry was swift, intense and ultimately effective. Four years after the bill was passed, efforts to level the playing field for the retail investor have stalled.
The most effective way to protect consumers is to impose a fiduciary standard on all market participants dispensing financial and investment advice to retail customers.
From both a common sense and public policy standpoint, the problem is obvious and the solution is simple. The savings and economic security of millions of American workers and retirees are being undermined by conflictridden advice and perverse incentives that encourage financial institutions and their agents to recommend inappropriate investments carrying substantial undisclosed fees and risks. The most effective way to protect consumers is to impose a fiduciary standard on all market participants dispensing financial and investment advice to retail customers. This would require all players to act in their clients’ best interest - aligning the interests of investors and their advisers and delivering a win for everyone.
Certified Financial Planner™, is the President and founder of Sentry Financial Planning, LLC, a fee-only financial planning firm. He does not work for any financial institution, sell financial or insurance products of any kind, accept or pay referral fees or work for commissions. He specialises in advising individuals and families on financial planning matters including retirement and investments. John is also a columnist/contributor for several publications and is known throughout Massachusetts for his educational seminars at libraries and organisations. John is a member of The Garrett Planning Network and the National Association of Personal Financial Advisors (NAPFA). www.sentryfinancialplanning.com
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The Directo r y of Prcot-oTrryan fparenc o s e r i D e y Th O ragraennicsyation p s n a r T s Pro s n o i t a s i n a g r O
A business shouldn’t stand out because it’s ‘pro-transparency’, it should be the norm. If you lead a pro-transparency organisation, join those already advertising in our directory. The more firms are seen here, the more weight gathers behind our argument that transparency is a commercial virtue and not a threat. We’re happy to consider classifications beyond those shown here. Please contact firstname.lastname@example.org for more information.
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ACADEMIC INSTITUTIONS Prof. Dr. Heinz-Dietrich Steinmeyer University of Muenster, Germany School of Law, Universitätsstrasse 14-16D-48143 e: email@example.com Muenster phone: 49-251-8329744 m: 49-171-8384816 I am a professor for Social Security Law, Labour Law and Civil Law at the University of Muenster Law School. My special field is pensions – occupational/ supplementary pensions as well as public pensions. I am doing consulting work nationally and internationally including international organizations (EU etc.). I am the Chairman of the European Network for Research on Supplementary Pensions.
AUTO ENROLMENT Steve Conley, Managing Director, Workplace Pensions Direct e: Steve.firstname.lastname@example.org w: www.workplacepensionsdirect.co.uk t: 0113 457 4563 m: 07850 102070 Since 2015, Workplace Pensions Direct has made auto-enrolment simpler for small businesses, enabling employers to focus on running their companies without having to worry about pension law, and the cost of poor pension decisions. Workplace Pensions Direct offers an affordable, end-to-end, auto-enrolment solution that guarantees compliance with the law. With professional expertise, a century of payroll and pensions experience, and professional indemnity insurance – Workplace Pensions Direct has removed the worry and risk of autoenrolment for thousands of small businesses and their advisers.
Gavin Perera-Betts, Chief customer officer, NEST e: Gavin.Perera-Betts@nestcorporation.org.uk w: www.nestpensions.org.uk t: 020 3056 3719 NEST has been set up by the government especially for auto enrolment. We’re here to make sure that every employer has access to a workplace pension scheme that meets the requirements of the new pension rules. But we do more than just meet the regulatory minimum. NEST comes packed with the sort of high-quality features you need, whether you’re saving with us, using us for your workers or helping your employer clients.
COMMUNICATIONS CONSULTANTS Lesley Alexander, Managing Director, Ferrier Pearce e: email@example.com w: www.ferrierpearce.com t: 020 3772 5360 Transparency – clarity, straightforwardness, honesty. As communications consultants, we support transparency in financial products, especially long-term savings. This applies not just to charges, but to the way we describe the products and their benefits to consumers. We believe the language we use should be clear, unambiguous and direct, helping people to make the most out of their money.
DATA SERVICES Larry McLaughlin, CEO | GSAV Ltd e: firstname.lastname@example.org w: www.gsav.io t: +44 203 655 2182 m: +44 7771 978 118 US m: x+1 646 946 5272 GSAV Ltd is Reg Tech/Fin Tech company exclusively serving the Buy-Side and delivering pricing solutions in the Collateral Lending Market to benefit Beneficial Owners and enable Managers to meet their Fiduciary and Regulatory obligations. GSAVr is a specialist pricing, tracking and regulatory tool and provides an independent price for collateral lending transactions that defines rate and use in a manner that the Regulators feels meets the test of both price and use. GSAVr is the only solution available today that addresses the current challenges of any form of collateralized lending, full price discovery and full price transparency.
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David Rich MIod, CEO | Accurate Data Services e: email@example.com w: www.accuratedata.co.uk t: 01603 813366 m: 07919918623 David is Chief Executive of Accurate Data Services, a specialistdata quality and positive people tracing business that is focused on unclaimed assets in the financial service sectors. ADS traces lost members, clients and policy holders for a variety of organisations including Life and Pensions funds, Banks and Asset Managers. The goal is to help businesses reunite their customers / members with their assets and deliver positive consumer outcomes. David is an active campaigner for transparency and action around the large unclaimed assets issues present in the UK.
FIDUCIARY MANAGERS Ralph Frank, CEO DC (UK), Cardano e: firstname.lastname@example.org w: www.cardano.com t: +44 (0)20 3170 5910 Cardano was founded in 2000 and now has over 150 staff with backgrounds in the areas of risk management, investment management, research, actuarial and investment advisory. Cardano studies the causes and impact of risk and costs in order to significantly improve financial performance and resilience. We currently provide Investment Advisory or Fiduciary Management services to over 1.3m pension fund beneficiaries with assets totalling over £120bn.
FINANCIAL PLANNING Mike Stafford CFP, Director, Stafford Wealth Management e: email@example.com w: www.staffordwealth.co.uk t: 01992 501601 Stafford Wealth Management was formed in 1986 to provide bespoke lifestyle financial planning and investment services to private clients. It is one of a small number of elite firms in the UK that is accredited by the Chartered Institute for Securities and Investment. Stafford Wealth Management is authorised and regulated by the Financial Conduct Authority for investment business.
INVESTMENT CONSULTANTS Marcus Whitehead, Head of Investment Consulting, Partner, Barnett Waddingham e: firstname.lastname@example.org w: www.barnett-waddingham.co.uk t: 0333 11 11 222 Barnett Waddingham has grown to become the UK’s largest independent provider of actuarial, administration and consultancy services. Our total headcount is now over 850 – with offices in seven locations around the UK. The investment consulting practice provides bespoke, independent investment advice to over 360 pension schemes with assets from the millions to billions. We continue to provide the personal, quality, tailored approach that has made us successful and has led to high levels of client retention.
INVESTMENT GOVERNANCE CONSULTANTS James N Meenan, Principal | JNM Investment Governance e: email@example.com w: www.jnmresearch.com t: +353 (0)1 687 1027 m: +353 (0)86 257 2646 JNM Investment Governance gives trustees independent coaching and support to develop strategies and techniques to stem the overwhelming resource handicap they face in discussions with investment professionals. JNM’s objective is to facilitate a constructive two way dialogue with attendant benefits for all parties.
Henrik Pedersen, Managing Partner & Co-Founder, Clerus LLP e: firstname.lastname@example.org w: www.clerus.co.uk t: +44 20 3356 2845 m: +44 7767 656234 We partner with pension schemes and other asset owners to review and improve investment decisions, governance and value-for-money, through independent and informed investment analysis. As a result, investment outcomes can be improved without the need to change service providers or taking on more investment risk. We offer a free initial assessment, so why not try us out?
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INVESTMENT MANAGEMENT Robin Oâ€™Grady, Head of Business Development, Hawksmoor Investment Management e: Robin.email@example.com w: www.hawksmoorim.co.uk t: 01392 410180 m: 07468 697900 Hawksmoor specialises in providing high quality discretionary investment management services for private clients including trusts, pension schemes and charities. We are a privately owned business with no ties to a bank or any other financial institution. Our experienced and well qualified team of investment professionals is focused solely on providing clients with the best service and consistently good performance.
NOT FOR PROFIT Dr. Kara Tan Bhala, President & founder, Seven Pillars Institute for Global Finance and Ethics e: firstname.lastname@example.org w: www.sevenpillarsinstitute.org t: +1(785)865-8824 (mobile) Seven Pillars Institute (SPI) for Global Finance and Ethics is an independent, nonprofit 501(c)(3), nonpartisan, organization whose mission is to highlight and analyze issues of moral philosophy in global financial markets with a view to enhancing ethical practice and policy.
PENSION ADMINISTRATION Margaret Snowdon OBE, Chairman, Pensions Administration Standards Association e: email@example.com w: www.pasa-uk.com m: 07983 565955 The Pensions Administration Standards Association (PASA) is a not-for-profit organisation which acts as a focal point to engage with industry and government on pensions administration matters. It was created to provide an independent infrastructure to set, develop, and provide guidance on pensions administration standards. It is an independent accreditation body, assessing the achievement of good pension administration standards by schemes and providers.
RESEARCH Jackie Beard, Director of Manager Research Services EMEA e: Jackie.Beard@morningstar.com w: www.global.morningstar.com/UK Morningstar is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offers an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors. Morningstar provides data and research insights on a wide range of investment offerings including managed investment products, publicly listed companies, private capital markets, and real-time global market data. Morningstar also offers investment management services through its investment advisory subsidiaries, with more than USD $200 billion in assets under advisement and management as of 31 December 2016. The company has operations in 27 countries.
SALES & MARKETING
COLOURS CMYK C100 M88 Y0 K0 C0 M0 Y0 K0
COLOURS CMYK C100 M96 Y8 K5
Arno Kitts, Founder & Chief Investment Officer, Perspective Investments C0 M0 Y0 K0
e: Arno.Kitts@PerspectiveInvestments.com w: www.PerspectiveInvestments.com t: +44 20 3290 6486 Perspective Investments is a multi-asset multi-strategy investment COLOURS CMYK C100 M88 Y0 K0 manager. We invest on behalf of our clients, including our founder C0 M0 Y0 K0 family. Our commitment to our clients is to help them achieve their financial objectives. We do this by aiming to deliver higher returns with lower volatility and better capital CMYKour investment performance track record preservation than conventional equity portfolios. Of course, COLOURS while C100 M96 Y8 K5 is consistent with this aim, past investment performance is not necessarily predictive of future results. C0 M0 Y0 K0
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The Transparency Times is the official publication of the Transparency Task Force; the collaborative, campaigning community dedicated to dri...
Published on Mar 28, 2018
The Transparency Times is the official publication of the Transparency Task Force; the collaborative, campaigning community dedicated to dri...