The traditional borders of investment management consultants' businesses are expanding to encompass outsourcing, defined contribution plans, global coordination and other services.
Veteran consultant Callan Associates Inc., San Francisco, is among the firms adapting to the change by trying new things.
Like other consulting firms, such as Frank Russell Co., Tacoma, Wash., Callan has entered the outsourcing arena. The consultant has won its first "co-fiduciary" client, which the company will not name.
Callan will craft policies, do asset allocation, hire and fire managers and monitor performance for the less than $1 billion pension fund, said Ronald Peyton, Callan's president. It will share fiduciary responsibilities with the plan sponsor.
But unlike Russell, Callan is not offering manager-of-managers funds in which to invest its outsourcing clients' assets.
Mr. Peyton said the firm wants to stay on the "consulting side of the line," and not be perceived as competing with money managers.
The growth of defined contribution plans also has opened up new avenues for consultants, executives said.
"There's business there writing guidelines, setting policies and defining due diligence on searches for DC options. Most of the work is on the DC side," Mr. Peyton said.
And the use of consultants for the defined contribution marketplace will continue to increase, said Phil Schneider, managing director of Watson Wyatt Consulting, Chicago.
"The importance of these plans is growing as plan sponsors become more interested in making sure they have the right program. A plan that started small, using mutual funds, may have substantial assets now," he said.
Unlike the defined benefit asset management business, mutual funds don't provide marginal fee breaks as assets rise.
"So you have people looking hard at the fees now," Mr. Schneider said. "The challenge for the consultant is what alternatives they can bring to the clients for consideration."
Some consultants exited one part of the defined contribution business when they entered another. Segal Advisors Inc., New York, for example, stopped offering record keeping in January 1997 when its launched DC-Connect, which helps plan sponsors determine what kind of defined contribution plan they need, helps them hire appropriate investment funds and assists with implementation.
Segal and some other consultants were driven from the record-keeping business by competitive pressure from mutual fund companies, said Robert Liberto, Segal vice president.
"We wouldn't have done this product five years ago because we were in record keeping and wouldn't have advised on it. Now we are back to our roots of giving professional advice," Mr. Liberto said.
Through DC-Connect, Segal has conducted 25 searches for corporate, public and Taft-Hartley retirement plans.
"The future clearly will be in defined contribution plans, which contain many fee structure differences. Plan sponsors don't always have that expertise," Mr. Liberto said.
He also anticipates the creation of a new type of defined contribution plan -- possibly to replace the 401(k) -- that would be fully portable.
"And any time there's change like that, there's a need for our help. There have also been so many mergers and acquisitions in corporate (pension plans) that there is a market there as well to help them combine plans, determine what stays and what goes," he said.
Consultants also are finding enormous opportunity helping multinational corporations coordinate their pension fund investments throughout the world, Watson Wyatt's Mr. Schneider said.
"I think it's going to be a significant movement going forward. We've gotten four of these assignments in the last four months, with a lot of it being driven by costs," he said.
Companies can use some of the same managers country to country, saving money because they can stack the fees and consequently save on administrative costs globally, he said.
"In a lot of cases, these are not all coordinated because when these businesses were opened, they may have been smaller. Now that the companies have $1 billion invested outside the United States, they start determining what the best practices are," Mr. Schneider said.
Providing performance measurement reports continues to be an important focus for most consultants, although the data crunching behind the business is more often outsourced these days.
Calculation of performance data is in many cases done by a third party. Consultants then analyze the computations, which they argue is their value-added contribution, and create reports outlining the investment performance of the institutional portfolios.
"The analysis of the data is what our clients seek," said Mr. Schneider at Watson Wyatt, which has outsourced performance calculations for about two years. "Our clients know the data is being processed by a third party."
Early next year, Bankers Trust Corp., New York, plans to extend its performance measurement service. It currently works with 14 consulting groups, providing tools to help consultants calculate returns and providing some value-added calculations as well.
But the firm is planning to offer performance computation upon request to all consultants and plan sponsors, whether or not their assets are held in custody at BT.
"You have to make your performance measurement system open enough to take data from noncustody clients and expand what you can offer," said Bernadette Murphy, manager of Bankers Trust's U.S. performance measurement services.
A due-diligence policing service of investment managers is the latest niche being cut in the ever-expanding business.
Arthur Andersen LLP is taking advantage of insecurities institutional plan sponsors may have in today's volatile market with the launch of a new business: investigation of investment managers' business operations; trading practices; risk management controls; and policy compliance.
"We think there's a real need, a real market for someone to go in and do fiduciary due diligence review of the money managers," said George O. Martinez, head of Andersen's investment management business and regulatory consulting practice.
The Boston-based unit was formed this summer and consists of attorneys and former members of the Securities and Exchange Commission staff.
"Most good investment advisory contracts permit the pension fund to go in and perform reviews of those operations. The pension managers haven't exercised their ability to do that and have historically relied on pension consultants, who focus on performance and investment style. We don't see ourselves intruding on or replacing the services of the traditional pension fund consultant, but standing beside them," he said.
But Frank Campanale, president and chief executive officer of Salomon Smith Barney Consulting, New York, doesn't think Arthur Andersen is offering anything new. "The accounting business has been under some pressure. This new service isn't any different than what the consulting industry has done for the past 25 years," he said.
Arthur Andersen's due diligence program is priced according to how many managers a fund wants to examine, Mr. Martinez said. The group has won several new clients, which Mr. Martinez won't name.
Despite all of the changes, consultants' primary job continues to be providing seasoned, well-researched advice, said Michael Dieschbourg, national director of institutional consulting for Salomon Smith Barney Consulting Group.
Part of adding value is helping pension funds with very specific changes they may want to make, Mr. Dieschbourg said.
"What were once fragmented offerings can become financial engineering, involving the transition of managers, the impact of trading costs," he said.
Smith Barney Consulting recently launched a custom asset liability index that determines the value of liabilities in today's dollars. Some plans calculate future funding liabilities by looking at a complicated series of cash flows that could extend decades into the future, but that approach fails to take into account the future cash outlays of each individual year, according to Salomon Smith Barney officials. Consequently, a fund's year-to-year cash disbursement is not always accurately reflected, Mr. Dieschbourg said.
For instance, a pension fund could be too heavily invested in stocks, although the major portion of its liabilities are expected to be incurred in the near future, he said.
"We are creating an asset-liability model not from an actuarial standpoint, but with pricing from the market," Mr. Dieschbourg said. It provides Salomon Smith Barney with another new product to sell to retirement plans interested in changing their current operations.
Martin Levenson, now a consultant to Segal and one of the firm's founders, said he sees many consultants moving into investment management and brokerage, both areas where there is a potential for conflict.
"Segal won't be in those businesses because we want to be in a position of objectivity. We saw a conflict of interest," he said.