In reporting on their own performance, Fiduciary Managers (FMs) must navigate a tricky set of conflicts. Not only are they responsible for grading their own work, they can help set the exam questions and define the mark scheme! So how do you know if they have done a good job?
The rule book is loose in what FMs must provide. Reporting standards, to the extent they exist, promote consistency in specific areas but do not extend across the full breadth of detail of importance to clients. Much is left to the FMs’ discretion to pick and choose what they wish to include and where. This can then be tailored to their own agenda, rather than that of their clients.
As part of our FM Evaluate Team’s ongoing programme of research, we’ve reviewed the very latest client reporting packages across the major FMs in the industry. Our assessment process has highlighted meaningful differences among their periodic and online reporting and we’ve updated our FM ratings accordingly. Here we’ll take you through the key questions you should be asking in assessing your FM’s client reporting.
Barnett Waddingham’s latest FM reporting ratings
Is your reporting evolving in line with best practice?
A changing investment environment and evolving client needs imposes increasing demands on FMs’ reporting. Interestingly we are seeing more divergence as some FMs are sprinting ahead while others are not keeping pace.
For defined benefit (DB) clients, the gilts crisis in 2022 has placed much greater emphasis on risks related to Liability Driven Investments (LDI). Our assessment is that roughly only a quarter of FMs provide sufficient detail on key risks related to leverage and hedging in standard reporting following the gilts crisis. The Pensions Regulator (TPR) has been particularly focussed on risks associated with LDI and collateral, and often FM reporting falls short. While responsibility for managing such risks is delegated to the manager, clients still need to understand their portfolio’s resilience through reporting on the level of liquidity, leverage and expected cash requirements (referred to as 'collateral headroom').
"Most smaller clients are not seeing their ESG reporting improve anywhere near the same rate as larger clients."
Clients increasingly want to understand their impact on society and the environment, as well their portfolio’s sensitivity to these issues. Reporting on environmental, social and governance (ESG) factors has therefore become an increasing focus for FMs. Regulation is driving improvement in ESG reporting but this is geared toward larger clients (e.g. greater than £1bn in assets). Therefore, most smaller clients are not seeing their ESG reporting improve anywhere near the same rate as larger clients. Extending ESG reporting across all FM clients, covering metrics such as a portfolio’s contribution to increases in global temperature, can help to reduce this gap.
Clients also want transparency around fees from their FM. While total costs can vary, we have found that around three-quarters of FMs don’t even disclose the fiduciary management or underlying asset management fees charged to clients in regular reporting. FMs provide a detailed breakdown of costs and charges on an annual basis – as mandated by industry regulation – but this is often difficult to interpret and to benchmark against the market. Adding fee disclosures to quarterly reporting increases transparency and awareness around costs and charges for investors. Such disclosures can be particularly useful for DB clients approaching their endgame, considering the cost of maintaining a de-risked portfolio ahead of buyout.
Are the basics of reporting right?
Additional detail should not detract from a report’s basic principles. Your reporting should be simple to navigate around and up-front in its key messaging, so that you can easily establish whether the FM is meeting your main performance objectives.
As an example, take DB schemes looking to align with TPR’s new DB Funding Code of Practice. Clients should be able to easily identify from their report if they are on track to meet their long-term risk/return targets, and whether performance in the latest reporting quarter was conducive towards this. They shouldn’t have to sift through 50+ pages to unearth this information (which is our experience for a number of FM reporting packages). The extent of success against their journey plan objectives should be evident from the start, with key points and actions clearly highlighted.
A report should also adequately explain where your quarterly and longer-term performance comes from. You should be able to compare actual performance against what was expected for each of your underlying portfolios.
- Do you know if active decision-making (which you pay extra for) is worth the money? 'Alpha' statistics can help determine this but are often omitted or difficult to decipher across multiple tables.
- Do you know whether your passive or hedging strategies have performed in line with targets? Appropriate attribution should identify and explain the source of material deviations.
- Do you know if strategic changes recommended by the FM are working? Analysis should illustrate how the FM’s prior strategic advice and implementation has worked in practice.
Are you getting reporting information quickly enough?
Quarterly reporting should be timely – it becomes less relevant if received too late after quarter-end. However, client demand for more bespoke reporting can take longer to produce, especially when FMs have manual 'back-end' performance reporting systems. Delays also make it more convenient for FMs to gloss over unflattering performance, or wrong active decisions, with more recent, more favourable events.
On average, FMs issue their quarterly client reports around seven weeks after quarter-end. Based on our ongoing research the quickest reporting was within two weeks, while the slowest was issued four months after quarter-end! By this point one has to wonder what value there is in receiving anything at all!
We’re now seeing a trend in FMs investing to automate back-end performance reporting systems to reduce such lags. Quicker turnaround times could help accelerate quarterly meetings and make reporting updates more relevant to trustees.
Clients shouldn’t have to wait weeks to view key portfolio metrics, even allowing for improvements in data efficiencies. As such, FMs are increasingly turning to online reporting as a solution.
Every core FM provider now offers some form of online system – the simplest providing high level asset and liability tracking, supported by some degree of underlying asset positioning.
"The practical applications of online reporting beyond funding levels is an area of significant investment and development."
Some FMs are using online reporting to extend the amount of ‘live’ information available. Others are using their online reporting as a way to make reporting more interactive. A selection of FMs are even considering how artificial intelligence (AI) could be used to support with presentation of information.
This all requires a significant investment in technology and automation to improve the practical application of online reporting. However, the product should vastly improve the decision-usefulness of such systems for end users.
How can you restore impartiality to your reporting?
Our award-winning Fiduciary Evaluation Team offers independent oversight for trustees and sponsors looking to assess if their FM is adding value. We can ask the questions FMs don’t ask of themselves and help you understand how your FM’s performance compares against other providers. This process can help lead to improvements in the reporting you receive from your FM.
Our independent oversight reporting can make it easier for you to assess whether your FM is delivering against your investment objectives. Such independent ongoing monitoring often flags issues not highlighted previously by FMs. We can then work with trustees to develop a framework for addressing any issues.
In summary
Client reporting has evolved substantially over the last few years with FMs having to make significant investment and improvements to keep pace. Because of this, we’ve reflected changes in industry standards within our client reporting assessments and adjusted (both up and down) our ratings for half of FMs.
Clients’ demands for more detailed and bespoke reporting is causing a strain on the time some FMs take to deliver their reports. FMs have been investing in technology and automation to shorten timeframes and create more informative online reporting. With technological developments continuing to accelerate we ask "Will AI be both the future of online reporting and used in clients’ best interests? Or will it be just another tool for FMs to tailor the exam questions further in their favour?"
Still unsure on the quality of your FM’s reporting? Reach out to our FM Evaluate Team who can provide an impartial, expert view and identify areas for enhancement.
- Blog co-authored by Senior Investment Client Manager James Hadfield
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