Very rarely do you come across a true maverick in financial services. Often those pushing views that go against the mainstream have an agenda all of their own. But Dr Chris Sier is a man who has ploughed a lonely furrow investigating dark corners of the asset management industry he believes hide massive transfers of cash from the investing public to the financial services giants that profess to look after it for them.
His ground-breaking research into fund management charges in local government pension schemes has revealed some astonishing levels of charging, most notably one scheme that had portfolio turnover of 3,800 per cent in a single year.
His research into charging has led some corporate advisers to question their own approach to the way they conduct their business and has been a major factor in the ongoing overhaul of fund management transparency and charging.
Sier reckons no one has any idea how much money is disappearing in charges, although his best estimate is that it is somewhere in the region of 2.5 per cent a year.
He has mapped out a complex chain of expenditure, with the total cost of ownership made up of admin charges, investment management charges, custody charges, equity, fixed income and alternatives trading charges, FX charges, stamp duty and taxes.
His research has been mainly carried out through scrutiny of the local government pension schemes, because being public entities they have to respond to Freedom of Information Act requests. Similar enquiries for data made of private sector organisations have received blanket refusals.
“In the local government pension schemes there are some asset managers who have more than 20 segregated mandates with more than 20 pension funds. But they only provide one type of fund, be it UK equity, US equity, or whatever. So in other words they are doing the same job for 20 different funds that have the same liability match, they have all got the same long term objectives.
“No one knows whether everyone gets the same deal. And it is the same in DC world. So a fund will become flavour of the month because it is recommended by a consultant, and so all the funds pile into it. Are they all paying the same amount?”
Sier cites to a paper by Tim Jenkinson of Oxford University’s Saïd Business School published in September that pointed to billions of dollars being paid by pension funds and other large investors on investment advice of low value.
“There is a herd mentality where they make the same recommendations because they are not doing the due diligence they should be doing,” he says.
“Do they have the same way of dealing with revenue of stock lending? Because you would think they would do. Yet they won’t disclose this information. Why not? They should do, so I can show that there has been no naughtiness going on. The fact you won’t give it to me makes my antennae twitch,” he says.
He is critical of the practice of paying for research paid out of soft commissions.
“Lets develop a hypothesis here that you use the same piece of research across all those funds, because it is the same job you are doing. You only need to buy it once. But is there an equal allocation of purchasing that research across all of those funds through churn? Or does one particular fund pay it because that fund is not paying attention and that is the one where they can squeeze extra revenue from extra equity brokerage fees?”
He recalls a situation where a manager attempted to pack in a lot of churn just before a fund was removed, because they no longer had any incentive with regard to performance and want to maximise the research pot they could raise through soft commissions. “On this occasion the adviser and his client attacked the manager and got compensation,” he says.
“Two guys at the Corporate Adviser Summit came up to me after the event and said ‘yes we have had instances where a particular fund manager, in the year before it was having its mandate removed, was creating massive turnover in the fund’” he adds.
“But part of the problem is that no one wants to look like they have been asleep on the job. But one of the key times when you do have an opportunity to do something about this is when there is regime change. So when a local authority changes party, the incoming party is keen to clear out all of the skeletons and is happy to show the outgoing team as being negligent,” he says, pointing out this as an opportunity for forward-looking advisers to add real value to clients and differentiate themselves from their peers.
Portfolio turnover and soft commissions for research are at least getting some scrutiny from the FCA, which published a consultation on the issue last month, but which has stopped short of a total ban. And the Investment Management Association is consulting on making it a requirement that schemes publish the amount of research they levy out of client funds through soft commissions.
But Sier believes an equally big issue is internal foreign exchange rates, where custodians or investment houses buy and sell shares in different currencies without making clear the exchange rate that has been used.
“The pension fund gives all its money to its bank manager, the custodian, which has the complicated job of managing cash, valuing securities, manage corporate actions, and make sure the right amount of money is there, across multiple currencies and asset classes.
“The pension fund sets up the equivalent of direct debits to a bunch of external organisations, fund managers, who can draw down on its money. If you are a fund with your money coming in in sterling, that is your currency. That is great for UK equities. But if you have say a US equity manager, the custodian tells the broker that there will be a transaction for, say, a million IBM shares and the price is $110m. But how did he get from pounds to dollars?
“He can probably execute it at zero cost, other than the cost of the transaction. He chooses not to, but at a market cost that he picks and likes. So even though it is only an internal transfer at zero cost, he still applies a fee for doing it. And the fee for doing it is what is in question. What is the spread and commission? What was the spot price?
“Until about two years ago nobody had ever been able to break in to get this information. Custodians guarded it jealously. I was specifically told, do not ask about this, do not ask about FX and do not ask about stock lending,” he says, pointing to court cases in the US that made headway towards doing so.
So couldn’t an adviser analyse the number of shares bought and figure out the rate that way?
“But what time was the trade done? They will not actually tell you when it happened, so no you can’t calculate it,” says Sier, who has experience working in the asset management industry. “It may be that it was executed at a stock price, but you have no idea what the spread was. You don’t know the time stamp. You have no idea at all what has happened.”
Sier also argues investors are missing out on revenues from stock lending.
“It should be paid over, but is it? No. I have evidence from the annual reports of local government schemes which shows 80 per cent didn’t have any stock lending programme. About 5 per cent said ‘we have asked but they won’t tell us’, and a small minority said ‘we don’t want to do stock lending because we don’t want our assets put at risk.’
Sier is sceptical of the Coalition government’s reasons for rejecting Labour pension shadow Gregg McClymont’s pension bill amendment that called for a full investigation of hidden charges in the fund management industry.
“I cannot imagine what reason there would be for not examining something where there is evidence of a lot of money being drained out of pension funds,” he said.
He is similarly scathing about the DWP’s logic for not investigating hidden charges in its charge cap consultation, where it argues that one result of greater charge transparency could be people opting out of schemes to avoid higher charges.
“That is like not investigating child abuse by Jimmy Savile for fear of upsetting people’s memories of seventies TV,” he says.
“How can the DWP say there is a charge cap? How will they calculate it?” says Sier.
To illustrate the general mood of opacity that pervades the asset management industry he points to a moment in a debate at October’s Corporate Adviser Summit where he asked Nest to reveal their charge on one of their mandates.
“Nest didn’t want to reveal what their charge with UBS was because they didn’t want them to take away the nice sweet deal that they have, which I don’t think is that sweet to be honest. But if we don’t have the numbers, how can you have a benchmark.”
He points out that Nest is no exception in this regard – deals with fund managers are almost never made public – an issue he believes plays into the hands of managers at the expense of scheme members.
Sier would like to see fund managers’ remuneration more closely aligned with the interests of the end investor, which could potentially see them actually getting more money rather than less.
He envisages a performance fee approach whereby revenues generated through foreign exchange and other trading costs are outlawed, but where fund managers are paid more where they outperform their benchmark.
Allow fund managers to make more money by making their clients more money, rather than through convoluted methods such as soft commissions, cross subsidies and stock lending.
“That makes the asset manager responsible for looking to the custodian and saying ‘no you aren’t going to take the FX costs out of this, and you are going to pay some money into the fund for interest income, and actually for the stock lending we are going to share it with the pension fund, because when the pension fund gets benefit, I get some benefit.
“‘And in fact, broker, I am not going to do lots and lots of trading through you because where is my incentive to do that?’”
Such structures may be years down the line. But the transparency train is gaining momentum. The asset management industry may see Sier as a thorn in its side, but as a playwright once said, they are only words unless they’re true.
