Melissa Bailey Photo
Controller Jones: No conflict.
Morgan Stanley had a great idea for how New Haven could save money — by doing business with Morgan Stanley.
Morgan Stanley gave that advice in its new role as adviser to New Haven’s police and fire pension.
Its first advice: Switch the pension funds’ custodial bank to … Morgan Stanley.
The Harp administration took the advice. At a City Hall press conference this week, Daryl Jones, the city’s new controller, announced that the move will save $700,000 per year — which, compounded by interest, could add up to $11.2 million over 10 years — by reducing the fees charged to manage its pension funds.
An expert in pension forensics, meanwhile, cautioned against a potentially dangerous conflict of interest.
“Brokers purporting to provide objective advice to pension funds has been very problematic because there are these conflicts of interest,” said Edward Siedle, a former Securities and Exchange Commission lawyer who has investigated over $1 trillion in public assets.
Siedle noted that New Haven just let go of its previous pension adviser because of that firm’s conflict of interest.
“New Haven has time and again made missteps in managing pension funds,” he said.
The city has two municipal pension funds: the $200 million City Employees’ Retirement Fund (CERF) and the $330 million police and fire pension fund. They both use Northern Trust as the “custodial bank,” where the money is kept. The boards for the two funds have agreed to switch most of that money, some $400 million to $500 million, from Northern Trust to Morgan Stanley, said Jimmy Kottage, chairman of the police and fire fund.
The savings comes because Morgan Stanley will charger lower management fees, Kottage said.
The police and fire pension fund board hired Morgan Stanley as its new adviser after its former adviser, Larry Gray, stepped down in November amid a federal investigation into allegations that Gray steered $64 million in Atlanta pension money to his own hedge fund. New Haven officials have been subpoenaed about potential conflicts of interest in Gray’s dealings in New Haven as well. Morgan Stanley is also the adviser on CERF.
Jones explained the new savings this way: Northern Trust currently serves as a middleman, taking on the responsibility of paying fees to the investment managers who handle the pension fund money. Northern Trust charges the pension fund for that middleman role. Morgan Stanley will charge a lower middleman fee, Jones said.
The city would keep some money with Northern Trust, which would stay on its role of cutting checks to pensioners, Kottage said. Workers’ pension benefits would not change.
Siedle.
In an interview Thursday, Siedle (pictured) cast doubt over the wisdom of allowing Morgan Stanley to take on the dual role of adviser and custodial bank.
“The potential dangers are: The firm is involved in myriad business operations, and there may not be full disclosure of all of the fees they’re making from those various lines of interest,” Siedle said of Morgan Stanley. “They’re in a position to basically recommend themselves in various capacities.”
Siedle said best practice would be to hire an investment consultant who isn’t in the money management business.
“Savvy public pensions don’t use conflicted investment consultants, because of the pivotal role that they plan in recommending management,” Siedle said.
Spiotto.
James Spiotto (pictured), a Chicago-based lawyer who has worked in the municipal pension field for 30 years, took more of a middle-ground stance on New Haven’s deal.
“On its face, if it appears that they’re pointing out that there is a way in which they can save money or make money, and that’s just a factual determination,” Spiotto said. Cities shouldn’t lose out on that savings just because of who their pension adviser is, he said.
At the same time, he said, there are lingering questions: Morgan Stanley may offer low management fees now, but given that Morgan Stanley is the adviser, who will monitor those in upcoming years to ensure they are still the best deal around?
Jones said he sees no conflict of interest — just a good deal that will save the city money. He said Morgan Stanley guarantees to undercut other firms’ management fees.
“They are the lowest fees that are out there,” Jones said.
“It just makes good prudent sense to not pay Northern Trust any more money than we have to,” and to switch to Morgan Stanley, he said. “I wish we had done this years ago. We could have saved us a lot more money.”