In case you hadn't heard, the pension consulting business is in turmoil. And in many cases, clients -- that is, pension trustees --haven't heard from their consultants.
Many consulting firms are losing key employees to money managers and shutting down offices. One reason for the loss is consultants generally do not pay their employees salaries competitive with those in the money management industry.
Do consultants advise their clients when they have lost key employees? In my experience, they generally do not.
Like most people in the business, I often refer to investment consultants as "gatekeepers," who provide a due diligence service to pension fund trustees. The consultant's job is to inform trustees about all facts material to investment decisions. It has become increasingly clear to me, however, that while consultants may be thorough in their review of money managers and provide their fund clients with full disclosure on manager developments, consultants regularly neglect to disclose important information about themselves to trustees.
It is not at all unusual for a pension fund trustee to receive a recommendation from his fund's investment consultant to terminate a manager because of "personnel turnover" or "organizational changes." The consultant's duties typically include not only guidance on selecting managers, but also ongoing reviews of existing managers and their performance. Certainly loss of key personnel at a money management firm and other "organizational" developments, such as questionable manager conduct, are matters about which fiduciaries responsible for overseeing pension assets should be advised.
But often pension fund trustees are the last to learn of their consultants' own personnel losses. Money managers to which the consultants' employees have been applying for jobs and others in the "manager grapevine" know well in advance. I can't tell you how annoying it is to hear "on the street" something my consultant hasn't told me.
What about when former employees of the consultant are hired by a manager that the consultant subsequently recommends? Does the consultant disclose that a former employee now works for the manager? After all, a conflict of interests does exist. The consultant might favor the manager because of the prior employment relationship. Again, in my experience, consultants do not routinely disclose this kind of information.
Finally, consultants increasingly are turning to alternative sources of revenue to boost their bottom lines; apparently there isn't enough money in the "pure" consulting business to keep many firms interested. Consultants are selling services to money managers and hosting conferences where their manager clients can, for a hefty fee, meet their pension fund clients.
I'm not saying it is wrong for a consultant to make money from having me as a client. What I am saying is that I want to know about it. And I want to hear about it from my consultant -- not from "the street."
We trustees should ask that consultants apply to themselves the same criteria they apply to money managers, and report about changes and business activities at their own organizations.
Jack Silver is a trustee and financial secretary of the Chicago Public School Teachers' Retirement Fund.