Much has been written about the markets travails in 2008, and the impact that the hugely negative returns had on retirement programs worldwide. However, little has been written about the impact that the economics of the relationship between the plan sponsor and investment consultant has on managing retirement investments effectively.
Specifically, consultants are paid too little for the role that they play and the responsibility they bear for the long-term success of retirement programs. In many cases, consultants are inappropriately resourced for the expanding role that they are asked to play, and it is directly related to the lack of financial wherewithal.
For the better part of the last 40 years, consultants have been used by plan sponsors for a number of services, including asset allocation, manager selection, performance measurement, fee negotiation, crafting policy statements, ongoing due diligence, education of trustees, and so on. Asset consulting firms come in many shapes and sizes, and many provide additional services depending on the company, such as actuarial, brokerage, custodial and investment management. Often these additional services are premium products providing substantially more fee revenue, and as such, the consulting services are often discounted.
The discounted nature of some of these relationships place an undo burden on the independent, traditional consulting-only firms that cant match the artificially low fees of some of their more diverse competitors. As a result, these firms have tended to have smaller research teams than they should, often staffed by young professionals just learning their craft. These researchers are bright and enthusiastic, but inexperienced, often with tenures that fall short of a full market cycle, (bull/bear, value/growth or small cap/large cap). In addition, this lean structure places a great burden on asset consulting firms when significant interest grows in new asset classes such as alternatives, or subclasses, such as 130/30. This lack of experience will be a continuing issue unless the economics for consultants change.