Issue: March/May 2008


Where market conduct is misconduct

As ever, Rob Rusconi is controversial. In a new report, he poses a series of pointed questions ostensibly to help trustees. They beg answers, because the research that backs them suggests some disturbing industry practices. The potential for abuse of funds by their agents is real.

The head of one of the world’s largest compilers The head of one of the world’s largest compilers of stock-market indices was once asked how his operation was able to generate huge profits. His response was disarmingly simple. “We’re merely one service provider taking a tiny little sliver from every trade that’s transacted.”It’s the identification and interrelationship of all these tiny little slivers – through an inordinately long and complex food chain, producing at each link the various slivers of profit for service providers and expense for retirement funds – that Rob Rusconi has pieced together in a provocative discussion document.

Entitled “South African Institutional Investments: Whose money is it anyway?”, he steers through the wonders to drive home the basics. Simply, the money belongs to those who save through the funds and not to agents who might be inclined to put their own interests first.

The agents come in all shapes and sizes, from trustees lacking in diligence to consultants and asset managers not lacking in remuneration incentives. Implicitly, the former is the flip-side of the latter. Meticulously set out are the sorts of interest conflicts on the part of agents, with an abundance of practical illustration, that can come at high cost to the funds as owners. There’s nothing trite in the self-perpetuating confusion, misplaced but rife, about whose money it is anyway.

Rusconi’s word is not the last. Nor should it be. Neither is it intended to be. On the contrary, it invites challenge. And the more vigorously it is challenged, the healthier for an industry government is committed to reshape.

The paper is primarily concerned with market conduct. The motivation, says Rusconi, is to “equip trustees to be more effective in the execution of their responsibility”. Which brings with it the corollary of the relationship between fund trustees and their service providers, too often practised in an unquestioning haze compounded by disequilibriums of information, expertise and confidence that disfavour fund members.

This is not merely a discussion paper, as Rusconi modestly insists on describing it, for it shakes at pillars of the financial establishment. Like a roll of thunder in the distance, one can never be quite sure of how much closer it might come and how fierce a storm it might cause.

For one thing, the study is so easily digestible and so comprehensive that it will sit at the elbows of many trustees for their constant reference. The same should go for conscientious financial journalists, such as there are, to whom concepts like “transition management” and “bonus pool” are revelations. To this extent, it can define terms for future discourse.

To be sure, also, it underpins the Financial Services Board’s good-governance circular PF 130 and offers serious input for National Treasury’s proposals on retirement fund reform. Rusconi posess a series of questions, in the manner of a Socratic dialogue, where the probes are grounded in the context of his accompanying research. They are almost rhetorical, begging an obvious answer, perhaps designed to force the overturn of conventional wisdoms if not to scream as recommendations for attention. For example:

On active management

  • Have the trustees understood that, on average, active managers provide an investment return before fees that is in line with the market?
  • Have they considered an appropriate allocation of equity assets from active management to index-linked alternatives?

On trustee training

  • Are trustees given sufficient opportunity to receive training so that they can exercise their responsibility in the best interest of the fund and its members?
  • Are they encouraged to read the fund rules and clarify issues not clear to them?
  • Is the training adequate and sufficiently independent so that it doesn’t deepen trustees’ dependence on their service providers?

On investment consultants

  • Have trustees considered whether the financial interests of their consultant are independent of product providers? If not, how does the consultant manage possible interest conflicts?
  • Is the consultant remunerated in a manner that aligns its interests to the fund, and at a level reflecting its skill and value?

On fee models

  • Have trustees considered the models used by service providers to determine their fees?
  • Are the fees appropriate and competitive?
  • Are the fund managers or consultants in a position to receive fee enhancements for performance related to skill, not to general levels of the market?

On marketing

  • Have the trustees signed a code of conduct that controls the extent to which their decision-making might be influenced by other parties (eg, by gifts)?
  • Do their service providers adhere to a code, established  by a credible industry body such as the Chartered Financial Analyst Institute, covering the calculation and reporting of their investment performance?

On surveys of managers’ performance

  • Do the trustees depend on them in making decisions (eg, on the asset manager to select)?
  • Have they considered these surveys’ technical limitations, or the possibility that results showing absolute and comparative performance can be flawed?
  • Where intermediaries use these surveys to support their advice, do trustees ask them for alternative information sources?

On trading dynamics

  • Have trustees sought to understand the costs involved in portfolio trading?
  • Do they receive trading reports that show whether trades are executed in their funds’ best interests?
  • Where funds use multiple managers, are trustees able to ascertain whether there are trades that bring no benefit to the fund because they merely switch a security from one manager to another?

On multi-managers

  • Have the trustees satisfied themselves that their service provider has the skills to carry out their fund’s mandate and does not earn undisclosed or inappropriate revenue through its relationship with the fund?
  • Has the multi-manager been asked to describe, to the satisfaction of the trustees, how underlying managers are identified, how weights allocated to each manager are determined, and how much time is spent carrying out due diligence on the capabilities of each manager?

On socially responsible investment

  • Have the trustees established an SRI policy, and have they communicated it to fund members?
  • Do the trustees ask their asset managers to report on their corporate governance and SRI policies, citing examples that can demonstrate their commitment?

The questions, preceded by Rusconi’s “observations”, are loaded by virtue of the practices he has unearthed. To be properly understood, they should be read within the context of the full report (published on the TT website Before hitting the print button, bear in mind that it runs to 160 pages. The effort is worthwhile.

For here’s the challenge: Fault it!


Rob Rusconi

What’s in it for him? Apparently, nothing. Rob Rusconi undertook this mountain of work, he says, because “it needed to be done”.

He wasn’t commissioned and he receives no payment. “I call myself a researcher and a consultant, not one or the other. Sometimes, I do research not linked to an agenda. When I started this, I didn’t realise how big it would become. I got involved and it just grew. Where I found that I was weak in certain areas, expert contributions from insiders helped provide an overall perspective that gave me the shot to explain industry practice. Every chapter was checked by a respected colleague.

”Rusconi, to the chagrin of many, flaunts his independence. Having qualified as an actuary at UCT, he spent six years at Old Mutual and then two years with a large actuarial consultancy in London. This was followed by a year on, the Financial Times’ electronic arm, where basically he had responsibility for the Pan-European fund-rating system.

This, he found, “got me out of the actuarial world and into the real world”. The experience was complemented by a subsequent stint in Argentina “where I experienced a completely different environment and realised that the pensions systems we actuaries learn about in South Africa and the UK are not the international norm”.

This led him into cost analyses, and gradually to “the status of being unemployable by service providers”.