Challenge to conflicts of interest

Publication Date: 1 September 2002
Publication:: Superfunds

Australian superannuation funds face a looming conflict of interest problem when they hand over their advisory, administration and asset management services to a single consulting firm, according to a new independent consultancy, The Heron Partnership.

Well-known superannuation industry figures Christopher Butler, John Smith and Wendy Barton have formed The Heron Partnership to challenge what they see as the potential for conflicts of interest.

"Conflict arises when the consulting company starts recommending itself for asset management, or for fully packaged services under what is assumed to be an independent position," Butler says.

This may be motivated by a desire to capture assets under management (AUM) to improve their organisation's share or sale price. "For every $100 million of AUM, the value of the consultant's business increases by $3 million to $6 million," he says.

Butler claims advisers who are independent from the ultimate supplier of services are more likely to act in the client's best interest.

His advice is for funds to take immediate steps to validate their risk profile and review the processes and procedures of good corporate governance. The review should be made against members' expectations, particularly those relating to investment choice. Butler proposes a three-stage risk evaluation that:

• Identifies the pressure points caused by a concentration of delegations to individual service providers;
• Assesses risks, including a concentration of potential conflicts of interest; and
• Mitigates risk through appropriate action and application of strong governance principles.