Fiduciary management involves overseeing assets on behalf of multiple investors with transparency and accountability. Pension funds are early adopters due to lack of resources, and trustees must be replaced if they deviate from the pension’s direction. The model originated in the Netherlands and gained popularity in Europe and the UK.
Fiduciary management is a financial formula, but it is also about accountability. In financial markets, overseeing assets on behalf of multiple investors requires a high degree of transparency and accountability. In some cases, as with pension funds, no one person or company could manage the entire investment process. The money managers selected under a fiduciary management model can be linked to one or more of many asset classes or categories and can be changed according to policies outlined by the owner of the assets, such as a pension fund.
Pension funds are early adopters of fiduciary management, in part because these institutions often lack the manpower and resources to orchestrate just the right financial management. Typically, a pension fund consists of a chief investment officer, an investment team, and a board of directors to support or deny recommendations. In addition, a third-party advisory firm is often retained by a pension fund to guide the direction of the investment portfolio. All of these members meet regularly to discuss the direction of a fund. A third-party trust company makes decisions on behalf of the pension in cooperation with plan staff and in accordance with an acceptable strategy.
Money in the pension fund that represents the retirement of plan members, or employees, is invested in the financial markets to increase the value of the assets. Pension fund managers direct most of their total portfolio to different asset managers and pay fees to these companies in exchange for overseeing the money. Pension has a list of different asset managers for various asset classes such as stocks, bonds and real estate. Placing all of the pension fund’s assets in the hands of a trustee is essentially entrusting the fund’s investment decisions to the company.
It is not uncommon to hear a pension official state that a change is being made to this list of trustees as a fiduciary responsibility. If an asset manager is not generating the types of profits expected or is deviating from an original investment strategy that aligns with the pension’s direction, the trustee would require the pension to replace that asset manager. Stewardship also extends to performing proper due diligence on asset managers before placing any money in the hands of these companies. The lines can get blurred when a trustee is also a money management firm and a potential bidder for a pension client’s contract.
Pension funds and health insurance companies in the Netherlands were the first to use fiduciary management. Anton van Nunen is widely credited with originating the formula. The model eventually gained popularity in other parts of Europe, including the UK.
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