“Sunlight is said to be the best of disinfectants; electric light the most efficient policeman”
-Louis Brandeis

The above quote is taken from Other People’s Money And How the Bankers Use It, a collection of essays published in 1914, criticising what Brandeis (later to become a Supreme Court Justice) saw as anti-competitive collusion between investment bankers and large corporations. Ever since, this expression has been used to support calls for greater transparency in everything from finance to politics and the media.

The most recent demands for greater transparency in the financial sector have arisen from work undertaken by the UK Competition & Markets Authority (CMA) as part of their Investment Consultants Market Investigation. Their final report highlighted a greater need for comparable performance information across the industry, especially in relation to fiduciary management offerings. The proposed solution – the Fiduciary Management Performance Standard – aims to allow trustees to compare the performance of different fiduciary offerings in a consistent fashion. The proposal enjoys widespread support, with a survey of trustees on the social media platform mallowstreet apparently showing 100% support for the idea.1

With modern computing power, demands for greater transparency are easily met by simply monitoring, measuring and publishing ever greater quantities of data. Indeed, measures and targets have come to dominate management practices across both the public and private sectors in many western economies. The New Labour UK governments of the late 1990s and early 2000s famously embodied this trend with centrally determined performance targets implemented across vast swathes of the public sector.

Unfortunately, this “measurement culture” created numerous unintended and damaging consequences. In particular, an excessive focus on targets and peer-group comparisons (usually in the form of league tables) led to participants gaming the system and engaging in performance-chasing behaviours in order to produce the “right numbers”.2 In hospitals, for example, there were reports of corridors being relabelled as “pre-admission units”, and wheels being removed from trolleys so they could be re-designated as beds. In schools, the intense media focus on league tables has resulted in widespread “teaching to the test” and a narrowing of the curriculum to focus solely on those subjects that count towards performance measures used in league tables. The problem is neatly captured in Goodhart’s Law: when a measure becomes a target, it ceases to be a good measure.

In asset management, the perils of a measurement culture are clear. Despite being regularly confronted with the warning that “past performance is not a guide to the future”, investors consistently display a performance-chasing bias – hiring outperforming managers and firing underperforming managers – that is ultimately wealth-destructive.3 The proposed Fiduciary Management Performance Standard risks introducing a new possibility for performance-chasing at the fiduciary manager level.

While the details are yet to be finalised, it is easy to foresee a world in which trustees are encouraged to regularly compare their scheme’s performance against similar schemes under the auspices of good governance. It doesn’t then require a huge leap of imagination to envisage trustees moving their business (and assets) away from fiduciary managers who have shown the weakest levels of performance in recent years, and towards those with the strongest performance. This will simply have the effect of amplifying existing trends within financial markets, with the best-performing asset classes and the best-performing managers seeing asset inflows (and vice versa).

Moreover, a highly publicised performance database will have an impact on fiduciary managers themselves. Just as asset managers respond to the threat of termination due to sustained underperformance by seeking to reduce their divergence from the benchmark (known as benchmark-hugging), so consultants and fiduciary managers are likely to limit the extent of their divergence from their peer group in order to avoid being seen as an eccentric outlier.

Rather than being a cure-all for the ills of the fiduciary management marketplace, directly comparable performance information is instead likely to exacerbate the problem of momentum-driven markets and their associated social costs.4 This is not to say that the way in which trustees select consultants and fiduciary managers cannot be improved – it surely can – but rather to argue that a performance database is likely to create more problems than it solves.

The fundamental problem identified in the CMA report is that of “low customer engagement”. In particular, the CMA found evidence that less engaged trustees end up paying higher fiduciary management and investment consulting fees. This is a highly intuitive finding; but providing lowly engaged buyers with a performance database that gives them a very easy (and supposedly diligent) way of making their decision is a recipe for simplistic backward-looking decision-making.

Improved decision-making will only follow from addressing the low engagement problem. On this point the CMA make some very sensible recommendations, such as mandatory tendering of fiduciary appointments and additional trustee guidance from The Pensions Regulator. Ultimately, what trustees need from a good consultant or fiduciary manager is a combination of integrity, expertise, humility, and an ability to listen and communicate well. None of these characteristics lend themselves to being easily measured and performance data will provide little or no indication as to whether a consultant has these qualities. Transparency can be valuable up to a point, but it is possible to have too much of a good thing.


1. https://www.ic-select.co.uk/blog/press-releases/press-release-third-party-evaluators-back-fiduciary-performance-standard.html

2. The House of Commons Public Administration Select Committee produced a report in 2003, On Target? Government by Measurement, which detailed numerous unintended consequences of the target-driven “measurement culture” that had been implemented by the Blair government.

3. Hsu, Myers, Whitby (2015) Timing Poorly: A Guide to Generating Poor Returns While Investing in Successful Strategies

4. Further detail on the social costs associated with benchmarking and momentum is set out in our paper A Model of Imperfection (February 2019)

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