"It's sort of a strange industry. You have primary responsibility for the management of trillions of dollars, but it's hard to get paid anything." said Jeff Holland, a former consultant who now heads the high-net-worth-focused asset management operations at Raymond James & Associates Inc., St. Petersburg, Fla.
Those economics have left consultants scrambling to fund expensive research operations while trying to keep flush money managers from picking off their talent.
The market-timing scandal that erupted two years ago also served to further limit the industry's options, with regulatory scrutiny prompting some consultants to forgo money-spinning side businesses — such as sponsoring conferences that money managers paid more than $50,000 a year to attend.
Now, consultants are banking on newer products and market segments to help fill the gap.
Rich Nuzum, president and chief executive officer of Mercer Investment Consulting, Chicago, cited his firm's push to sell comprehensive research to bigger plan sponsors, with billions in assets and in-house staff, as one effort "to create a market where one hasn't existed."
After less than two years of offering its global investment manager database, Mercer has more than 30 clients with a combined half trillion dollars in assets who pay $65,000 a year for web-based access to the same detailed research that Mercer's consultants have at their disposal.
"For somebody with a sophisticated in-house staff, that may be all they want from us, and we won't hold them hostage" by insisting on a traditional retainer relationship, Mr. Nuzum said.
For Mercer, it's a low-cost, high-profit product. For big plan sponsors, many of whom don't use consultants, the Mercer database provides a significant edge in doing due diligence, Mr. Nuzum said.
Jeffrey Van Orden, CEO of Norwalk, Conn.-based consulting firm Evaluation Associates Inc., said other investment consulting firms will have to seriously consider offering similar products.
But many other consultants cite the other end of the open architecture spectrum — clients who want their consultant to take on greater responsibility for designing and maintaining their plans — as a potentially greater source of revenue.
Consultants would "welcome" those co-fiduciary assignments, said Jim Callahan, a senior vice president with Callan Associates Inc., San Francisco.
Howard M. Crane, practice director-Americas for Watson Wyatt Investment Consulting, Denver, said his firm's advanced investment solutions division is looking to benefit from the trend toward outsourcing, taking on "implementation responsibility" for all administration and management of a client's plan, including the hiring and firing of managers. Fees are some basis points of plan assets.
So far, Watson Wyatt has three clients with a combined $10 billion in assets in the program. He declined to identify them.
Focusing on big clients adds economies of scale, Mr. Crane said, but Julie Bonafede, senior managing director with Wilshire Associates Inc., Santa Monica, Calif., said small to medium-size plans are more likely candidates for an expanded relationship.
Stephen P. Holmes, president of St. Louis-based Summit Strategies Group, said a basis point fee arrangement where a consultant adds value can be more rewarding than a traditional retainer relationship with a plan 10 times larger.
Summit was recently competing for the business of a public fund with more than $10 billion in assets and found the $500,000 retainer fee it was proposing was "double everyone else."
If Summit charges a $500 million plan 10 basis points of the client's assets for taking a "heightened role" in managing the fund, it would earn roughly twice as much as the $10 billion public fund appeared willing to pay, Mr. Holmes said.
Michael A. Rosen, a principal with Angeles Investment Advisors, Santa Monica, Calif., agreed. A basis-point fee can make a $20 million plan a better business proposition than a retainer from a $200 million plan — especially with the greater efficiencies from having more decision-making authority, he said.
Clients that give Angeles discretion make up a tiny part of total client assets, but account for roughly one-third of the firm's revenue, Mr. Rosen said.