BOSTON - Leading investment consultants are losing market share to smaller niche firms, a new research report from Cerulli Associates concludes.
In its first-ever research on investment consultants, the Boston firm also found:
c More consulting firms are sprouting, mostly the result of spinoffs.
c Competition has intensified, spurring some consulting firms to narrow their focus and others to broaden it.
c Opportunities for consultants are increasing as the number of defined contribution plans grows and companies become more sophisticated about running them, moving them out of the human resources departments to departments focused on these plans.
c Many consulting firms have gotten rid of their proprietary databases, turning their attention instead to adding value through analysis.
The report is a compilation of four surveys conducted six months ago. The qualitative analysis involved interviews with 50 industry executives. They included top personnel at consulting firms and service providers to consultants.
Online surveys
The quantitative portion is based on online surveys that targeted, separately, investment consultants and best practices within the industry, members of the Investment Management Consultants Association, and asset managers and their best practices in serving institutional investment consultants.
Kathleen O'Connor, the Cerulli senior analyst who conducted the surveys and wrote the report, said one of the surprising findings was the trend of new firms coming into the industry.
"It's largely due to sponsors hiring more than one consultant. Now, many (sponsors) will hire them for a specific project or for a search; if hired for specialized projects, it might be based on areas of expertise such as asset-liability modeling. In addition, because of the poor stock market, more specialized firms have popped up," Ms. O'Connor said.
"Firms with real strength in alternatives have gained momentum and picked up market share as plans put more emphasis on alternatives to gain alpha."
She expects more plans will use multiple consultants as they move into more varied asset classes such as absolute return strategies and other alternatives.
The increase in defined contribution plans also means new opportunities for consultants, Ms. O'Connor said. Although DC plans hadn't traditionally used consultants, more are doing so now because they fear fiduciary risk, particularly because of bad stock markets and corporate scandals. Many are writing investment policy statements for the first time, she said.
Ms. O'Connor said consultants pay no attention to the DC market, but they are going to lose market share if they don't get into it, particularly because the defined benefit market has been contracting.
New England Pension Consultants is one firm that has been successfully expanding to meet the demand, Ms. O'Connor pointed out. Historically, it had just one office, in Cambridge, Mass., but it recently opened an office in Detroit and added one consultant in Las Vegas and one in San Francisco. Another is CRA RogersCasey, Darien, Conn., which has expanded into alternatives after taking over the Wellesley Group. That deal also expanded RogersCasey's client base because Wellesley mostly worked with foundations and endowments, and RogersCasey's clients were mainly pension funds.
The surveys also found that plan sponsors with sizable defined benefit and defined contribution plans have been combining oversight of the two under one person or group. They usually use the same money managers for both plans, which gives investment managers and consultants a chance to leverage marketing.
Other findings:
c Some 69% of the firms surveyed organize their consultants according to geography, while 31% are organized by market (such as public, corporate, defined benefit, defined contribution).
c About 90% have a select list of managers the firm believes is suitable for its clients.
c Most client/consultant relationships last longer than seven years, with most clients saying their consultant is doing a good job.
c Consultants will become more influential as plan sponsor trustees turn over more decisions to them, in order to better leverage their assets, Cerulli predicted.
