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
On trustee training
On investment consultants
On fee models
On surveys of managers’ performance
On trading dynamics
On socially responsible investment
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 www.totrust.co.za). 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!
THROWER OF THORNS
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 FT.com, 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”.