The proliferation of pension management databases and software - the so-called "consultant in a box" products -continues to drive changes in the way consultants develop their business and their relationships with plan sponsors.
Consultants say the replacement of traditional consulting functions such as performance analytics and delivery of historical data with automation is causing them to seek new lines of business and fine-tune their client relationships. To be sure, some pension funds are performing more tasks in-house, but the consultants claim they have adapted to concentrate more on problem-solving and interpretation of the data generated by such programs.
The consultants also are being required to be more knowledgeable and able to explain their recommendations to clients, who have much of the same information within their reach. But the additional information also means the client has a better grasp of the situation before beginning work with the consultant, which only helps move discussions along, according to consultants.
Thanks to the advent of cheaper, more powerful computers, the virtual consultants have exploded in the 1990s. Nearly every large consulting firm - and many smaller ones - now offer some form of consulting software.
The programs have taken information that in the past might have been more difficult to gather and made it so much more available that the data have turned into more of a commodity in the marketplace, said Janice Harding, managing director of Russell Data Services, Tacoma, Wash., the division of Frank Russell Co. that develops software. In doing so, it has shifted the work of the consultant from providing that commodity to more strategic information and advice, she said.
Many plans are replacing consulting functions with automation and using their consulting firms as backup for more sophisticated work, said Scott Lummer, managing director of Ibbotson Associates, Chicago. He noted that software packages are common among the top 300 corporate plans and top 500 public plans, and their use is trickling down to the midsized plans.
Last year, RogersCasey & Associates, Darien, Conn., launched a bargain-priced software package with manager information for sponsors, managers and consultants. The product, InvestWorks, starts at $499 per year for the basic module; additional modules can be added at various prices for analyzing mutual fund performance relative to separate and commingled accounts and to assess "style drift" in portfolios, among other tasks.
One firm, Asset Consulting Group Inc., St. Louis, launched a World Wide Web site that includes some of the information included in the "consultant-in-a-box." The site, www.sponsorlink.com, has been up for more than two months, said Gus Catsavis, vice president and senior consultant.
The site has full information for all equity and fixed-income indexes; a section with regularly updated information on products, performance, asset flows and fee schedules for about 70 participating managers; and manager sections - a kind of site within the site - that function as interactive brochures with mini-requests for proposals and performance analytics.
The site gives away much of the same manager search information a consultant would give a sponsor. Quite candidly, said Mr. Catsavis, the idea is to put the firm out of the information delivery business and concentrate on advice.
The site has a "research kiosk" with samples of investment policies, requests for proposals and charts that sponsors can use to draft simple documents. In addition, it has an education area that gives sponsors a primer on a changing selection of topics such as commission recapture, and electronic message boards aimed at different types of sponsors, such as teacher retirement systems.
The automation has made a dent in the defined contribution side, as well. In fact, 401(k) plans have spurred the explosion in automation, said William Cleary, national practice leader, retirement plan services, at Sedgwick Noble Lowndes, Melville, N.Y. The sponsors find it useful to run "what-if" scenarios for their plan participants and other modeling and education functions, he said.
Software has automated a lot of the statistical jobs a defined contribution plan record keeper used to perform but hasn't completely replaced consultants, said Larry Heller, principal of Kwasha Lipton, Fort Lee, N.J. Plan sponsors can do most straightforward calculations and number crunching themselves, but it takes a sophisticated program to identify the highly compensated employees or interpret regulations, he said.
"Whomever is crunching the numbers has to take a step back and say 'What are the numbers telling me?'. . . That provides an opportunity for the consultant," said Mr. Heller. Programs are less expensive, more powerful and more flexible than they used to be, but it's still hard to replace the accumulated expertise of an entire consulting firm's staff, Mr. Heller said.
"I find that, when (sponsors) have access to more information, they also have more questions and they're more interested in verifying their analysis . . . to guide them through the decision. They end up making more informed decisions, which is good for everyone," said Mr. Cleary.
The programs are an advantage to the client for several reasons, said Mr. Lummer. It helps cut costs over time because sponsors aren't paying fees for things they can do themselves, and it helps decision-making by focusing sponsors on pertinent issues before seeking the consultant for value-added services such as risk management "instead of hiring us to do the minutiae," he said.
Additionally, morale can be an issue, said Mr. Lummer. If the sponsor merely does what the consultant says, the sponsor may question whether he has any control over the plan or any contribution to make to its management, he said.
"I'd love it if our clients relied on us for every little calculation . . . but realistically it's in their best interest and in our best interest to keep their costs down," said Mr. Lummer. If sponsors use software as a backup to a consultant, "they can focus on what they want to focus on, cheaper and better," he said.
The availability of all of this information on the sponsor's desktop is also reshaping the relationship between consultant and client, say consultants. Besides using the consultant differently, the clients are now approaching discussions with some ideas of their own.
The client is now better informed about what its specific situation is, having sketched it out with the help of analytical software, said Mr. Lummer. Consultants were overdelivering reams of printouts with information plans didn't need, he said. This way, the consultant can concentrate on the value-added services.
"All we're doing is cutting off the front end of the question. They're taking up the number-crunching part of the analysis, but they still need the problem solving," said Mr. Heller.
For example, Mr. Lummer noted one Ibbotson client has a plan that invested 50% of its total assets in small-capitalization stocks and hardly anything in international stocks because its program was looking at the last five years of data and saw that as a good policy. The policy is wrong, not because the data is wrong, but because it is using a time frame that is too small to make the decision, said Mr. Lummer. Ibbotson's consultants can show data going back several decades to justify adjusting the allocation to one much less volatile and better suited for the plan's objectives, he said.
There are some dangers in some products because they can simplify information to the point where the user comes to the wrong conclusions, and that's where the consultant comes in, said Ms. Harding. The consultant can correct mistakes, warn about potential pitfalls, give advice on new products that don't have track records yet and other functions that don't show up on the screen.
"Like any tool, they can simplify the manipulation of data, but the correct interpretation of it comes from a lot more experience with the data and understanding of the implications of it in the marketplace. That's a role that I think still applies for the consultant," she said.
The existence of the software, and the client's ability to use the software to check on a consultant's performance, makes for a more challenging relationship, said Mr. Lummer. There is more potential for more give-and-take between the two, said Mr. Heller.
"When the plan sponsor is totally reliant on the consultant . . . the sponsor has less in its lap to agree or disagree," he said.
This forces the consultant to be more efficient and more knowledgeable, knowing they will have to explain themselves to a client who already has the basic information, said Mr. Lummer. If consultants are not doing their homework - analyzing only a small group of managers instead of the whole universe, for example - clients can notice, he said.
"It's a bigger challenge for the consultant because he has to justify the additional expertise that he lends," said Mr. Cleary.
Consultants have had to reinvent their business in response to this trend, finding new lines to replace some of the traditional asset allocation and manager search assignments that are now being handled in-house, said Mr. Lummer.
"That's why you've seen SEI (Corp.) move into the money management business, that's why you've seen Rogers Casey bought by BARRA, that's why you've seen Ibbotson Associates make a push into non-traditional consulting business," he said.