CHICAGO — Jack Marco, chairman of Taft-Hartley consulting heavyweight Marco Consulting Group, says his firm’s fledgling independent fiduciary business could double or triple this year, as more clients turn to Marco to make investment decisions on behalf of their retirement plans.
In an interview, Mr. Marco said his Chicago-based firm has three independent fiduciary clients: the $1.5 billion Bricklayers International Union, Washington; the $1.7 billion Service Employees International Union, Washington; and the $30 million Electrical Workers, IBEW, Local 223.
Another three to six clients may sign on this year, predicted Mr. Marco, who founded Marco Consulting in 1988 as an investment consultant. The firm launched the independent fiduciary business at the end of 2004.
Consultants have traditionally advised pension clients in areas such as asset allocation and money manager selection, but final decisions have typically fallen to boards of trustees. In recent years, however, a growing number of consulting firms — including Angeles Investment Advisors LLC, Summit Strategies Group and Watson Wyatt Worldwide — have begun taking on decision-making responsibility for some client’s retirement plans, within parameters set by those clients.
While declining to say which of his firm’s 240 full-retainer consulting clients could be next, Mr. Marco said “surprisingly, some of the most interested, receptive people have been at the larger funds.” Marco has 20 consulting clients with more than $1 billion in retirement assets.
Steve Abrecht, the executive director of the Service Employees International Union, said big union funds with their own chief investment officers and staffs might not be in the market for the new services Marco is offering, but it could “make sense” for midsize funds with a few billion dollars in assets, at a time of rapid change in the capital markets and recent regulatory changes exemplified by the new Pension Protection Act.
Boost in earnings
With consultants earning a basis-point fee for taking on decision-making responsibility, rather than the straight retainer fee garnered for advice, the new line of work has provided consultants with a means of adding leverage to their earnings model. Industry veterans say the fee for managing a client’s portfolio can match a retainer fee for merely advising a client with 10 times as much in assets.The fees Marco earns for taking on decision-making responsibilities are superior to retainer fees, but clients gain from the firm’s ability to quickly translate its expertise into action, Mr. Marco said.
Marco officials declined to provide specific details on fees.
Previously, if key members of a portfolio management team serving a retainer client departed, it could take anywhere from three or six months, and a few board meetings, to decide what to do, and then execute that decision. By contrast, when a team running domestic small-cap equities for an independent fiduciary client left last year, it took only three weeks to move the account to a new manager, Mr. Marco said.
Likewise, Marco’s independent fiduciary investment committee, made up of the most senior people at the firm, can make swift decisions on asset allocation and the introduction of new asset classes that would otherwise require a lengthy effort to win over a board of trustees. For example, for Marco’s first set of independent fiduciary clients, “we took a good hunk of the fixed-income allocations and put it in funds of hedge funds,” with the same level of volatility, Mr. Marco said. The results “have worked out fabulously well.”
That ability to be nimble has helped the Bricklayers International Union — a client of Marco’s since the firm’s founding and its first independent fiduciary client — garner the highest returns of any of the firm’s clients during the past two years, Mr. Marco said. The portfolio enjoyed a gain of more than 15% for 2006 alone, he said.
Clients also enjoy lower money management fees. Marco acts as the only point of contact for money managers serving independent fiduciary clients, reducing demands on those managers in terms of time and travel. In return, “we’ve been pretty successful negotiating reductions in fees” of up to 10 basis points, Mr. Marco said.
From talk to action
Mr. Marco said the decision to launch the business grew out of a chat he had with John J. Flynn, the Bricklayers’ board co-chairman, following a grueling meeting in mid-2004 that included presentations by nine different managers to fill three separate searches.
Afterward, Mr. Flynn asked Mr. Marco if he would be able to pick the best of three proposals for tile work on a new building. When Mr. Marco said he wouldn’t have a clue, Mr. Flynn suggested his board members often felt the same way. Marco’s independent fiduciary business was born out of the ensuing talks with the Bricklayers to find “a better way,” said Mr. Marco.
Mr. Flynn wasn’t immediately available for comment, but David Stupar, executive director of the Bricklayers International pension fund, said Marco’s transition from a consulting role to its current independent fiduciary role has been smooth, even as the firm reshuffled the fund’s manager lineup and added some new asset classes.
Mr. Stupar said the Bricklayers’ board now meets with Marco once a month, instead of quarterly. Meetings typically last 30 minutes or so, but can go longer if there’s some new development to discuss, he said.
With Marco playing a new role, independent fiduciary clients have had to retain a new consultant to oversee the work Marco is doing. The Service Employees International Union’s Mr. Abrecht said his plan, which chose Marco to take on the role of independent fiduciary last September after putting out a referral for proposals, picked Washington, D.C.-based Independent Fiduciary Services Inc. as its new consultant.
Asked about potential conflicts of interest, such as giving independent fiduciary clients preferred access to managers facing capacity constraints, Mr. Marco said his firm does the same research at the same time for all clients. The only difference with the independent fiduciary service is that, instead of advising trustees to make the best decisions, Marco’s employees get to act on their convictions, he said. That structure puts a lot of pressure on Marco to get it right, but at the same time it’s highly rewarding, he said.
