A good time to be a consultant

The bear market, a bust for most plan sponsors and money managers, has been a boon to investment consultants.

Despite the fact that search activity has been down the past few years, investment consultants are more in demand now than at any time during the 1990s bull market.

The number of plan sponsors using consultants jumped 20% in 2002 to 79%, according to Mercer Investment Consulting Inc.'s Tracker database.

"This is an environment where plan sponsors feel less confident about operating independently," said Robert Burke, practice leader at Mercer in New York.

"There's no question that the demand for consultants has ratcheted up," said Louis Harvey, president of Dalbar Inc., a Boston-based research firm that follows the consulting industry. "Consulting firms are seeing more business than ever."

Consultants agree. "This is a great time to be in the consulting business," said John Dickson, chief executive officer of CRA RogersCasey, Darien, Conn. "Challenging markets create opportunities for consultants," said Mr. Dickson, and the demand for consultants is as strong as it has been in years, he added.

Consultants, such as CRA RogersCasey and Frank Russell Cos., Tacoma, Wash., are reinvesting in their businesses via acquisitions. CRA Advisors acquired BARRA RogersCasey last year, and earlier this year, Frank Russell acquired a stake in San Francisco based consultant Strategic Investment Solutions Inc.

Most of the new gigs — asset allocation and asset-liability studies, performance reviews and corporate governance services — are prompted by the rash of underfunded pension plans and corporate scandals.

Mr. Harvey said a significant number of pension funds hired consultants for the first time in 2002.

"Plan sponsors that didn't use one before have found religion," said Mr. Harvey. Those that hired consultants for the first time were primarily small to midsized plans in the corporate and foundations and endowments areas. Also, a number of defined contribution plans brought consultants on board for the first time as issues like company stock, manager selection and diversification of the fund lineup became more important.

There's an element of "hand holding" to the recent consulting boom, said Matt Crisp, principal at eVestment Alliance, an Atlanta-based institutional database provider. Now that positive investment returns are hard to come by, pension executives — particularly those that haven't used consultants before — are looking for reassurance or a second opinion, he added.

Data from Greenwich Associates, Greenwich, Conn., indicate that executives at large pension funds are seeking additional consultants that specialize in specific areas such as alternatives, or that work on projects.

Dev Clifford, a consultant at Greenwich, said fees paid to consultants have increased in each of the past five years. And, Greenwich expects to see an increase in the use of and reliance on consultants in the next few years.

Meanwhile, pension executives continue to hire consultants for performance and operational review audits, said Samuel Halpern, executive vice president at Independent Fiduciary Services, Washington.

"People's patience is being stress-tested under these circumstances," said Mr. Halpern. His firm takes a broad view of a plan, looking at things the retainer consultant doesn't always look at, such as cost and quality of service, lines of reporting and conflicts of interest. "If the consultant (on retainer) looks at A through F, we look at G, H, I and J," said Mr. Halpern.

Consulting could really take off if the advice provisions of the Pension Security Act (HR 1000) is approved by Congress, said Mr. Harvey. The advice provisions would allow consultants to act as fiduciary advisers to plan participants. It also allows firms that sell investments, such as broker-dealers, to dispense advice. "We're seeing an upturn that would seem to be meteoric if HR 1000 goes through," said Mr. Harvey.