Transferring assets from one manager or asset class to another – the so-called transition business – affects plan sponsors large and small. But this particular request for proposal (RFP) is likely to affect the environment in which transition managers are selected, executives in that business say.
First, this is not an RFP to select a transition manager for a particular transition – it is, in effect, designed to select a ‘bench’ of providers (three providers is the target) for the state’s ongoing transitions for a period stretching out to five years. Second, the RFP requires that transition providers take on a fiduciary role, which some players – most notably the bulge bracket investment banks – have historically shied away from. Finally, a consultant firm – San Francisco-based Callan Associates, and specifically Bo Abesamis, who hitherto has focused on custody and securities lending – is overseeing the RFP: That leaves open the very strong likelihood that Callan will look to extend this expertise to a wider client base.
The development of a ‘bench’ of providers is not, in itself, a brand new development. Public funds in particular, anxious to avoid the rigmarole of a new search every time a transition comes up, have in the past created retainer-type relationships with transition managers. But the Washington State RFP takes this to a new level, not least because of the five-year period attached to the mandate. Sources close to the issue say that the original driver of the RFP was a one-time benchmark shift for the indexed assets of the Washingtonfund, but as the fund grappled with the search, a more long-term outlook evolved.
Not everyone agrees with such a long term approach however. “Developments in the trading world in general are accelerating rapidly.” says Robert Kay, who at Global Securities Consulting Services (GSCS) has extensive experience at analyzing and evaluating transitions and algorithmic trading strategies. “Technology investment is allowing everyone to offer much more sophisticated approaches than were even conceivable two or three years ago, and new players are entering the business all the time. To suggest that anyone can select today, institutions that will still be in the transition management business in five years, let alone still be leaders at it is both dangerous for the client and smacks of hubris on the part of the consultant, however long and complex an RFP they may have created.”
The requirement of a fiduciary role is not brand-new either – willingness to act as a fiduciary has allowed some providers (specifically, investment management entities and divisions of the large custody banks) to win business away from the leading investment banks. For example, the 2002 transition for the Florida State Board of Administration (won by Morgan Stanley) on the system’s switch from a defined benefit to a defined contribution scheme is a case in point. Many of these mandates did not require the transition manager to take on a fiduciary role. However, some transition managers believe that the WashingtonStateinsistence on the transition manager taking on a fiduciary role may be a sign of things to come – and for the investment banks, this will require rethinking their business models or creating relationships with outside entities willing and able to provide a fiduciary wrapping.
Nor is Callan’s involvement in the transition space a radical notion. A number of consultants have played roles in quarterbacking RFPs. Frank Russell, as usual, has broken the mould in this regard – it has its own specialist transition team which directly involves itself in transitions. But Callan some time ago sold its broker/dealer, so it is acting as a hands-off consultant, and its expertise in the space is eminently scaleable.
The result might well be that this RFP – or a version of it – becomes a benchmark in the space. Transition managers complain loudly about its length and breadth (one called it ‘a beast’), and the time taken to fill it in – but it seems likely that every manager with aspirations in the space will complete it.
For those plan sponsors interested in seeing the ‘beast,’ it’s at http://www.sib.wa.gov/business/RFP03_09/RFP03_09.htm