2024 Consultants Report: Is there an inherent conflict of interest when consulting firms consolidate?

Certain fee arrangements, such as bundled fees, can also raise issues of conflict of interest because they can incentivize the use of specific consultants or investment managers. Consultants have processes in place and methods to help address this concern, but it’s not clear that any of those processes will fully address the inherent conflict of interest, she says.

Read: What’s the latest on benefits, retirement advisor fee disclosure?

“I think historically, investment consulting purported to be an objective means of evaluating third-party investment managers or funds that were selected by the employer. You have an inherent conflict of interest arising when the investment consultant exercises discretionary authority over the plan portfolio and specifically has access to its own investment funds or proprietary products or has access to services that benefit lines of business that are operated by the consultants.”

There are likely similar concerns with benefits marketplaces in the sense that the benefits providers featured in the marketplace may not represent the full spectrum of providers that are available, adds Seller.

It’s important to keep an eye on these evolving offerings and any conflicts, says Fred Hahn, president of the Canadian Union of Public Employees’ Ontario branch, adding transparency is one of the main challenges that the union faces in representing workers.

“We want to know, and workers deserve to know, who the service provider is and what the offerings are. In unionized environments, benefits and pensions are bargained provisions that are an important part of the overall compensation that workers receive. I think it becomes an issue of access to information and transparency in these different models that seem to be evolving.”

While consolidation has its merits and faults, it doesn’t represent any inherent conflicts of interest, says Brett Jennings, principal and senior defined contribution consultant at Mercer Canada, noting the main issue with consolidation is that it potentially limits the number of players in the market. “There will be a few key players that end up driving advice within this space and, as a result, the ideas can become quite limiting. It always helps to have diverse sources when it comes to consultation.”

Read: 2023 Consultants Report: How are consultants helping plan sponsors make the most of their benefits, retirement data?

Dave Patriarche, president of Mainstay Insurance Brokerage Inc., also doesn’t see any major conflicts of interest with consulting firms consolidating and evolving their offerings.

“It doesn’t affect anyone in my world, which is small- to medium-sized companies up to around 100 employees. Consolidation actually creates more opportunities for the advisors — roughly 95 per cent of us — that work with small businesses under 50 employees.”

However, he notes one negative aspect of consolidation is the lack of service for smaller clients when they become part of a much larger client base. With a smaller firm, these clients tend to get fast, direct service, often dealing with one of the partners or the owner.

“As those companies have amalgamated, merged and consolidated with the larger companies, the client becomes a little fish in a big pond and the service levels aren’t the same. It’s more difficult to be heard when you’re a [small part of a large client base]. But the other side is it provides a great opportunity for small firms that specialize in group insurance and are really focused on customer service to take care of those clients. And in many cases, that’s what we’ve seen is happening.”

Theoretically, consultants have to disclose all conflicts because of their licensing requirements, says Patriarche, adding because the majority of the industry is paid commission for sales, there will always be some conflicts.

Read: Culture of compliance prevents mismanagement, conflict at Canadian pension funds: expert

Outsourcing chief investment officers

When it comes to outsourcing chief investment officers, Jennings notes these offerings aren’t all built the same and it’s still a relatively new concept in Canada.

“There are a number of players in the defined benefit space, but there are fewer on the defined contribution side. Looking at the DC side, this is something Mercer has been doing globally for a number of years, not just in the Canadian market.

“Because there are so few players and very little experience in Canada, it means that the offerings actually look quite dissimilar and there’s not a general sense of where the market’s going. We approach this from a governance standpoint, so it allows clients to outsource a lot of their compliance-related functions, like manager selection [and] monitoring.”

While some of the CUPE’s members belong to larger pension plans that have internal management, such as the Ontario Municipal Employees Retirement System, many are enrolled in smaller plans that don’t have the same internal capacity and instead outsource oversight of investments to a third party, says Hahn.

“Our members are also involved in helping to make those choices. The benefits plans include voices for worker representatives, along with employer representatives. Based on the performance of whoever they might hand over the responsibility to, they get to decide who to work with. But I think questions [need to be asked] to make sure any conflicts of interest are clear and that people are made aware well in advance and in an ongoing way.”

Read: The challenges of the outsourced chief investment officer model

Many plan sponsors receive a proposal from their consultant’s OCIO, says Seller, noting there are a few crucial steps for plan sponsors to take when this happens.

First, it’s important they ensure any recommendation for an OCIO approach — or a delegated investment solutions product — is evaluated carefully and weighed against similar offerings, rather than simply proceeding on the basis of an initial proposal.

“Then they should ask for detailed disclosure from their consultants of how they’re dealing with these inherent conflicts of interest. You could ask for a copy of their conflicts of interest statements, you can ask some questions regarding the investment strategies, the pricing structure and the various processes to manage those potential conflicts.”

It’s also important for plan sponsors to get independent legal advice on the OCIO contract and throughout the selection and monitoring process, while having a rigorous review process for ongoing monitoring of the OCIO’s performance. As a general rule, Seller says it’s essential for plan sponsors to follow an independent process, both in terms of initially retaining that bundled investment service and to ensure ongoing monitoring and evaluation of their services.

Considerations for employers

If clients are concerned about conflicts related to an OCIO, Jennings says the first thing to do would be to complete an assessment to understand the methodology that’s being used by that OCIO provider.

Read: Survey finds 95% of U.S. public pension funds employ investment consultants

Fee transparency is another key aspect, he adds, noting as there’s a general lack of fee transparency in the Canadian market, it’s important to identify whether there are additional fees incorporated into the OCIO structure that other parties may be benefiting from.

Employers are also advised to do their due diligence when engaging consultants, says Patriarche, noting they can refuse the service if it doesn’t line up with their own interests.

“If someone’s concerned about how they’re getting paid or the conflicts that might arise around that, just ask. People are often reluctant to do this and we see instances of it coming up all the time. Employers will come to me for help saying, ‘We’re paying our advisor a retainer of $50,000 and we just found out they’re also being paid another $50,000 by the insurance company that we never knew about.’ And my answer is, ‘Did you ever ask them? Do you have an agreement outlining that they’ll take no commission, bonuses or overrides?’ It’s as simple as asking the right questions.”

While employers may often rely on outside parties to come up with solutions to problems, Hahn suggests they try to find internal solutions first if they have any concerns about potential conflicts of interest.

“We often argue with employers, particularly in the public sector where resources are often scarce, that every dollar needs to be spent in a way that’s about the provision of service to communities. Why not try to consult with the people on the front line who are actually doing the work? There may be times when a consultant is a good use of resources, but particularly in Ontario when every dollar is so precious, the option to study a problem and come up with a solution in-house should be explored.”

Sadie Janes is an associate editor at Benefits Canada and the Canadian Investment Review.