Investment consultants, lamenting their low fees and looking for new ways to boost revenue, ought to consider why they collect such small gleanings from the lucrative financial sector compared with money managers and others.
"It's sort of a strange industry," a former consultant was quoted as complaining. "You have primary responsibility for the management of trillions of dollars, but it's hard to get paid anything."
But their tears are suspect. There are a number of reasons to be skeptical of the consultants' lament.
The quality of advice to pension funds and others on asset allocation and money manager selection often is mediocre. The fees might be more than appropriate for the skill and knowledge the consultants display.
Also, some consultants have declined to accept fiduciary responsibility. Because of their exclusion, they can hardly claim to have "primary responsibility." Reward usually follows the acceptance of risk. Since they accept little risk, some might even argue these consultants are, in fact, overpaid.
What's more, money managers are generally paid too much for mediocre performance. If consultants were great at selecting managers, that would not happen. Also, one survey shows some managers earn different fees for different clients for the same service and same performance to the same size account. That indicates consultants generally aren't doing enough to help clients negotiate the best fees.
Plus, it is a mischaracterization to say consulting has not been a lucrative business. Although fees from pension fund clients might appear small relative to those received by other investment professionals, some consultants have parlayed their relationships with pension fund clients into revenue from brokerage operations, soft-dollar arrangements and services to money managers. These services include marketing advice, performance reports, product development and conferences.
These non-pension fund sources of revenue create conflicts of interest and were criticized in the recent Securities and Exchange Commission report on consultants.
At the same time, some consultants have found new revenue sources, such as social investing research, which is becoming more mainstream and which could have major economic and market impact.
Finally, independent consultants are thriving, offering value in the form of non-conflicted advice, and adding staff as they win more clients. They believe there is money to be made in investment consulting, by offering conflict-free, quality consulting — not conformity consulting.