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'Part and parcel'

Institutional investors using boutique consultants for advice on outsourcing

Because large consulting firms offer outsourcing, most are referring clients to smaller peers for searches

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Helping: Richard Nuzum sees a lot of business going to small consulting firms.

Institutional investors are turning to boutique investment consultants to help them find investment outsourcers as more established consulting firms have set up their own outsourcing businesses in recent years.

As traditional consultants have gotten into the discretionary outsourcing business, they've “effectively taken themselves out of a possible role running the RFP process” for institutional clients seeking outsourced CIO providers, noted Richard Nuzum, a New York-based senior partner with Mercer and head of the firm's investment business in the U.S.

That trend has coincided with a pickup in demand for outsourcing in recent years, resulting in a growing bias toward small consultants, including owner-operated, single-principal shops, said Mr. Nuzum, adding that Mercer has previously observed the same pattern in other markets such as Australia.

Last month, Rocaton Investment Advisors became the latest established investment consultant to launch an outsourced CIO business, joining heavyweights such as Mercer, Russell Investments, Towers Watson & Co., Cambridge Associates LLC and Hewitt EnnisKnupp.

NEPC, another holdout, joined the fray last year. A number of smaller competitors — including Angeles Investment Advisors, Marco Consulting Group, Wurts & Associates, Fund Evaluation Group and Segal Rogerscasey — are all in the game as well.

That expanding list has benefited the dwindling number of established consultants that has stubbornly stuck to traditional consulting.

Brian C. Ternoey, a principal with one such firm, Pennington, N.J.-based Curcio Webb, said his firm has helped roughly 15 clients think through whether to outsource investment oversight of their portfolios in the past three years, and demand for that service is “definitely increasing.”

But a growing number of institutional investors are turning to less well-known names for an independent view, including White Oak Advisors, Indianapolis; New England Retirement Consultants LLC, Boston; Botanica Capital Partners LLC, New York; and Tejera & Associates, Bainbridge Isle, Wash.

Seeing the trand

Executives with outsourced CIO heavyweights, such as SEI, which oversees $53.4 billion in assets for more than 425 institutional clients, and Strategic Investment Group, which manages $27.8 billion for 50 institutional clients, say they've noticed the trend.

Over the past 12 to 18 months, boutique consultants have overseen a growing number of the searches in which Strategic Investment Group has competed, noted Deborah Boedicker, a partner and head of business development and client service for the Arlington, Va.-based firm.

While some of those boutiques — such as White Oak — offer a range of services, outsourced CIO work has become a bigger piece of their business in recent years.

White Oak has 5 professionals, with searches for service providers “part and parcel of what we do,” James Robison, a principal with the firm, said in a recent telephone interview. But the market's stress test of 2007 to 2009 has prompted a growing number of boards of endowments, foundations and pension funds to tap White Oak to help them explore whether outsourcing portfolio oversight could be a better option for their purposes, he said.

MultiCare Health System, a Tacoma, Wash.-based, non-profit hospital system with combined operating and defined benefit assets of $1.4 billion, is one such client.

In a telephone interview, Judy Swain, MultiCare's treasurer, said referrals from industry contacts who had hired outsourced CIO providers led MultiCare to tap White Oak a year ago to manage its search. White Oak did a “very good job” narrowing down a field of roughly 20 competitors, resulting in MultiCare's hiring of NEPC in November 2011 to oversee its portfolio, while retaining a final say on manager changes, she said.

White Oak has helped 10 or 11 clients explore that issue over the past three years, but — in a sign of growing momentum — another three universities and two additional institutional investors have sounded out the firm in recent months about “providing such a service,” Mr. Robison added.

Other boutiques are focusing entirely on the outsourced CIO question.

Annette Parker, a former treasurer and CFO with Carlisle, Pa.-based Dickinson College, which outsourced oversight of its then $250 million endowment to Investure LLC in 2006, said she just launched her own consulting firm, Causeway Consulting LLC, Girdletree, Md., to help other institutions work through the same issues.

Ms. Parker said her independence, her experience working on a number of boards, and her understanding of the issues those boards face can give her a cultural edge in helping educational and health-care related institutions think through an outsourced CIO process, where achieving the right fit “is absolutely critical.”

Causeway Consulting is starting with one client and another proposal under discussion, said Ms. Parker.

Room for improvement

Strategic Investments Group's Ms. Boedicker said more than half of the business SIG has competed for over the past year came from institutional investors already being served by an outsourced CIO provider — a sign that there's room for improvement in better matching clients with providers.

Steven F. Charlton, the partner with Cambridge, Mass.-based NEPC who heads up that firm's outsourced CIO business, said the skills and knowledge that boutique consultants are bringing to the task of advising clients vary widely, as those firms move to fill a need in the fast-changing market.

Mercer's Mr. Nuzum said some boutique consultants help clients on a one-off project basis, while others provide that service and then continue to serve those clients on a retainer basis, providing oversight of the outsourced CIO provider chosen by the client.

Consultants working for those boutique firms argue they have been able to help board members wade through the difficult issues involved in deciding how much discretion, if any, board members should cede, as well as helping them choose from a rapidly expanding pool of outsourced CIO service providers.

Nanci D. Morris, an investment consultant with New England Retirement Consultants, said the number of outsourced CIO providers on her radar screen now is around 50, more than double what it was three years ago.

Even so, that number can quickly be narrowed down on the provider side by the different models of discretionary service they offer and the minimum amount of assets some set for clients. Clients are differentiated by the scope of discretion they're looking to cede as well as minimums for either a provider's track record or the amount of outsourced assets, Mr. Morris notes.

Most of the boutique consultants say they've picked up outsourcing searches by word of mouth — referrals from members of boards who contacted other boards they have advised, and/or from record keepers and law firms.

White Oak's Mr. Robison said in a number of instances his clients have been referred to his firm by the bigger investment consulting firms that have begun competing as outsourcers. When institutional investors ask those established consulting firms to conduct a search on their behalf for an investment outsourcing provider, consultants say they'd rather compete for the assignment, he said.