Running the Fund | Published in January 2011

“Safe” Passage

How to gain fiduciary protection when working with transition managers

By Judy Ward | January 2011
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Illustration by Dadu Shin

Sponsors that use transition managers often feel confused about their fiduciary responsibility, says Steven Glass, President and CEO of Zeno Consulting Group, LLC, in Bethesda, Maryland. They increasingly try to mitigate it by asking a transition manager to serve as a fiduciary—but that does not eliminate the issue.

For sponsors utilizing this service, gaining fiduciary protection means following a sound process throughout, starting with picking a transition manager. “Simply asking a transition manager to serve as a fiduciary does not absolve the plan sponsor from making the right choice,” Glass says. “There might be 10 to 15 firms that are considered top-tier transition managers, and they all have different strengths and weaknesses. It is a fiduciary decision to figure out which is the best firm to handle the transition.”

Many sponsors may lack that thorough process now. “Most sponsors have a road map that they have used to hire investment managers for years and years, and it includes enough time for planning ahead and vetting managers. Historically, in the transition industry, it was a hurried choice at the end of a long process of choosing a manager,” says Steve Kirschner, Tacoma, ­Washington-based Russell Investments’ Head of Transition Management, Americas.

What matters most when selecting a transition manager? Too much focus gets put on fees, Kirschner believes. “It is understandable: It is a very concrete aspect of the cost of a transition that investors can put their arms around,” he says, “but it is anywhere from 5% to 20% of the total cost. A lot of other aspects can have a much bigger impact, such as properly managing how you are exposed to the marketplace.”

Sponsors need to be careful to go with a transition manager that has an efficient process, says Roberta Ufford, a Washington-based Principal at Groom Law Group. “That does not have to mean the provider with the lowest fees,” she says, “but the one offering the best value overall for a particular transition.”

Sponsors should think about several questions before approaching possible transition managers, Glass says. First, consider trading-execution needs: the risks and exposures in the portfolio, such as pockets of illiquid securities or exposure to certain countries that will require a manager with demonstrable expertise in those countries. Second, he says, they should ponder their transition’s needs from an operations standpoint, in terms of back-office capabilities. “Too many plan sponsors ignore the operational side,” he says. “[It] can derail a transition just as much as poor execution.”