Demand still strong for investment consultants

Investment consultants say a year of gut-wrenching twists and turns didn't kill them - it made them stronger.

While consultants had to work overtime addressing the ripple effects of the market's collapse on areas such as securities lending, hedge funds and private equity investments, at the end of the day a number of firms reported growing demand from institutional investors for help in managing their portfolios.

“There are a lot of tired consultants running around, but business-wise, it's been fine. We've been growing,” said Julia Bonafede, senior managing director and head of consulting with Santa Monica, Calif.-based Wilshire Associates Inc.

Mercer Investment Consulting, whose $3.7 trillion in global institutional advisory assets for the year ended June 30 topped the charts in Pensions & Investments' latest survey of investment consultants, likewise enjoyed solid demand for its services, with the firm's president, Jeffery J. Schutes, reporting “strong double-digit growth in revenues.”

With its focus on risk mitigation and managing client assets and liabilities in a holistic way, “it's been a very good year for investment consulting” at Chicago-based Mercer, Mr. Schutes said in an interview.

Exciting times have translated into “unprecedented demand for our services,” agreed Bradley S. Smith, CEO of Lincolnshire, Ill.-based Hewitt Investment Group LLC, which ranked sixth in institutional advisory assets.

Several consulting veterans reported seeing little evidence of clients taking their advisers to task for not anticipating the market's systemic collapse or better positioning their portfolios to withstand the fallout.

Others, however, noted that the number of searches launched this year by institutional investors for consulting services has been the highest in recent memory — a possible sign that clients are under pressure to blame someone for the damage their portfolios sustained, said Dev Clifford, a consultant with Stamford, Conn.-based money manager consultant Greenwich Associates LLC.

This period is likely to be marked by “a lot of rotation in the industry,” with plenty of new relationships being formed, said Bryan R. Decker, managing director and chief investment strategist with 15th ranked Norwalk, Conn.-based Evaluation Associates LLC.

Data on public funds compiled by strategic consulting firm Eager, Davis & Holmes LLC, Louisville, Ky., showed 103 searches for consulting services during the first six months of 2009, although only a fraction involved clients looking to replace incumbent consultants.

The Eager, Davis & Holmes data showed Mercer garnering the most mandates, with nine wins, followed by ninth-ranked R.V. Kuhns and Associates Inc., Portland, Oregon, and fifth-ranked Ennis Knupp & Associates Inc., Chicago, with eight each.

Of the subset of 17 searches whose stated purpose was to replace an incumbent, no single firm either won or lost more than two clients.

On the whole, however, consulting veterans said the spotlight the market's recent volatility has thrown on areas such as risk mitigation, asset allocation and managing liquidity has served to highlight the value investment consultants can bring to the table.

“Historically, times of uncertainty have been good for our business,” as institutional investors who never used an adviser before reconsider the value of retaining one, noted Michael Rosen, a managing member and chief investment officer with Angeles Investment Advisors LLC, Santa Monica, Calif. Angeles Investment already has added a couple of clients this year that hadn't previously used an investment consultant, he said.

Executives with other consulting firms said they also have been hired this year by first-time consumers, including some midsize plans. “Over half of our new clients last year were firms that had never used an investment consultant,” including a few with portfolios of more than $1 billion in assets, said Hewitt's Mr. Smith.

According to data from Greenwich Associates, 82% of corporate plan sponsors and endowment funds were using investment consultants as of the fall of 2008. For corporate plans with more than $5 billion in assets, the percentage was 71%, up from 64% in 2007.

More important than new clients, however, has been the growing number of existing clients asking their investment consultants to take on more portfolio management responsibilities in exchange for a higher retainer fee or a basis-point fee — balm for an industry whose economic model has struggled to garner the revenues needed to retain key talent.

The complexity of the investment issues thrown in quick succession at trustees last year convinced many that their funds needed to be managed daily, not just quarterly, boosting demand for the “outsourced CIO” and “implemented consulting” services that consultants have been stepping up to offer, said David Eager, a managing partner with Eager, Davis & Holmes.

Consultants say the trend is strengthening. Implemented consulting and outsourced CIO-related business “continues to grow for us,” said Angeles' Mr. Rosen, who notes that almost half of his firm's base of just more than 50 clients has Angeles assuming some degree of discretionary oversight of their portfolios, up from just five around 2004.

Hewitt's Mr. Smith likewise reported “a huge spike” in demand for implemented consulting.

Evaluation Associates' Mr. Decker said there's no “one-size-fits-all” aspect to the growing number of conversations his firm is having with clients looking to have Evaluation Associates assume greater oversight of their portfolios. Where each client chooses to draw the line is different, he said.

More broadly, veterans say the experiences of the past year or two will prompt investment consultants to review broad areas of their business to incorporate lessons learned from the past few years. It's basically an opportunity “to re-examine what we've done in the past and improve on that,” and the healthy rebound by markets this year isn't likely to short-circuit that process, said Steve Nelson, co-head of consulting at Cambridge Associates LLC, Boston.

Issues pertaining to the management of liquidity, and re-examining governance structures to ensure decisions can be made more efficiently and nimbly, will be on the table even if less stressful market conditions are allowing clients to breathe more easily, Mr. Nelson said.

The recent lesson in how bad the market environment can get is promoting “a much more holistic view” of areas such as risk and liquidity, agreed Janine Baldridge, global head of consulting and advisory services at seventh-ranked Russell Investment Group, Tacoma, Wash. And while strategic asset allocation remains key, recent volatility has spurred discussions on overlaying a “tactical, near-term dynamic” to that process, she said.

Barry W. Dennis, managing director of San Francisco-based Strategic Investment Solutions Inc., predicted that one consulting industry focus over the coming year or two will be reducing clients' risk exposure to public equity markets, in a manner that allows them to continue improving their funded status. Strategic ranked ninth this year with about $704 billion in advisory assets.

People are likely to have less confidence in public markets going forward, agreed Mercer's Mr. Schutes, who predicted a greater focus on alternatives in the coming years, including hedge funds, private equity and infrastructure.

Mr. Schutes predicted the growth in demand for investment consulting services should continue in 2010.

Some, however, say a clearer line between winners and losers among consulting firms could emerge.

This isn't a “Lake Wobegone,” where every consulting firm can be above average, said Strategic Investment's Mr. Dennis. There may have been a pickup already of consultant searches completed this year, but many more are likely to come in the next 18 months, he predicted.

It's hard “to change horses in midstream,” and there's usually a “giant lag between a dislocation in the market” and subsequent changes, agreed Wilshire's Ms. Bonafede.

Angeles' Mr. Rosen said the rush of clients into implemented consulting and outsourced CIO relationships will eventually yield data to show which consulting firms are delivering and which aren't, leading to an eventual winnowing in that segment of the market as well.

Keith Mote, director of consulting with St. Louis-based Hammond Associates, said “the value consultants bring is being scrutinized more than ever. If clients get hammered on the downside a second time, or if they fail to fully participate in the upside as markets recover, consultants will be held more accountable than before.”