The tough market environment has proven a boon to the investment consulting industry. However, consultants aren't standing pat, but rather are expanding their services and broadening their scope to compete in what remains a difficult and changing business.
"Consultants are being challenged because their bread-and-butter market segment is gradually shrinking," said Meredith Brooks, managing director at Frank Russell Co., Tacoma, Wash., noting there are fewer traditional defined benefit plans to seek for business. As a result, consultants are seeking more business in the defined contribution, foundations and endowments, high-net-worth and money management arenas.
But for now, consultants are spending a lot more time with clients than they have in the past. The volatile markets have caused plan sponsors and their consultants to look at asset allocation, liabilities, risk profiles, corporate governance, fiduciary responsibility, investment education and contribution strategies.
Not just searches
"There is a misconception that our business is tied to the ups and downs of search activity," said Barry McInerney, head of the U.S. investment practice at Mercer Investment Consulting, New York. "Pure search activity is a minority of what we do."
"The consulting industry is really countercyclical," said Ted Disabato, president of Disabato & Associates, Chicago. "During difficult times, clients need to rely on consultants more," he said, because of the uncertainty in the market.
Just a few years ago, when the markets were booming and search activity spiked, things like developing contribution strategies was a lower priority for well-funded plan sponsors.
But now, pension plans, particularly corporate plans, want to make sure their asset allocation is in line with their business objective, said John Dickson, chief executive officer of CRA RogersCasey, Atlanta.
Clients are looking for more from consultants - including more accountability and a closer working relationship, said Mr. Dickson. Consultants that are prepared to meet the expanded needs of clients are well positioned in this new environment, he said. "You better know your clients better than before," Mr. Disabato said. "There's a lot more heavy lifting now, and that just creates a closer bond between consultants and clients."
Revenues are holding steady at many consulting firms, where the bottom line is not directly tied to the fluctuations of the market, said Mercer's Mr. McInerney.
The majority of investment consultants operate on a retainer and charge a flat fee for services. In this environment, that works well for both the consultant and the client, said Ronald Peyton, chief executive officer at Callan Associates Inc., San Francisco, because fees aren't tied to assets and clients get all the time they need.
Consulting firms with asset-based fees are having a more difficult time in the current market, so they have to generate a lot of new business to stay profitable, which is exactly what Hartland & Co., Cleveland, has done. "We are winning more new business than ever before," Thomas Hartland, president. Much of Hartland's new business is coming from small and midsized plan sponsors that haven't used a consultant before, along with other sponsors that have changed consultants, he said. Those sponsors hiring a consultant for the first-time are confused about the market volatility.
William Wechsler, vice president at Greenwich Associates Inc., Greenwich, Conn., said the consulting industry has become much more competitive since the standards for what consultants can offer are raised increasingly higher. "Consultants are running twice as fast to stay in place," said Mr. Wechsler. The firms that aren't continually striving to improve and expand upon their services will be left behind, he said.
One key area consultants are putting more resources toward is manager research, Mr. Wechsler said, as it has become much tougher to pick the long-term winners in a negative market environment.
Many consultants believe the industry will consolidate going forward and that there will be greater bifurcation with large national players on one end and boutiques on the other, with very little in between. "The survivors will be those that provide a wide range of services or establish themselves as a niche player," said Mr. Wechsler. Anyone caught in the middle will be in a tenuous position, he said.
Mr. Dickson at CRA RogersCasey believes there will be fewer larger players on the national level as the trend toward consultants needing more services and resources to survive continues. He expects the industry will undergo consolidation in the form of big firms acquiring smaller and midsized firms, as well as megamergers. Already, firms in the industry are forming partnerships.
In the past year, CRA Advisors acquired BARRA RogersCasey to become CRA RogersCasey. In August, Towers Perrin, New York, shut down its manager research operation in its London office to concentrate on its asset-liability practice. Later in the month, Towers Perrin, London, signed an agreement with Frank Russell Cos., London, to provide manager research for its clients.
Consultants also are benefiting by doing project work for clients through which a variety of services are sought on a customized or a-la-carte-type basis. Mercer has seen an increase in project work this year, said Mr. McInerney.
Florida's 'different approach'
The Florida State Board of Administration, Tallahassee, which runs the state's $88 billion retirement system, is expanding its use of consultants beyond the traditional sense. "We're taking a different approach to how we use consultants," said Coleman Stipanovich, executive director of the board. In July, the board hired Callan Associates to handle manager performance monitoring, splitting that function off from general consultant Ennis Knupp & Associates, Chicago. Ennis Knupp now focuses solely on investment policy and asset-liability issues while Callan focuses on managers.
Mr. Stipanovich said the board also is considering creating a pool of project consultants to handle additional duties on a project basis. For example, if there was an issue related to rebalancing, the board might issue a request for proposals for that particular project, he said. Hiring a number of consultants is a way to seek out specialists for a given issue and gain access to additional "brain power" he said.
Bob Hogan, managing director at Towers Perrin in New York, said his firm is seeing more business from clients who want both actuarial and investment consulting services offered by the same firm. "More plan sponsors are looking for their consultant to put it all together," said Mr. Hogan.
Despite the fact that the market has generated negative returns, consultants say plan sponsors largely have been patient with consultants. "A lot of trustees (of pension funds) are looking at their own mutual funds, their own investments, and are seeing them down 20(%), 30(%), 40%. Then they are seeing their pension fund down 5(%), 6(%), 7% and saying it could've been a lot worse," said Mr. Peyton.