The big winners of the financial crisis might be the investment consultants.
According to participants at a Pensions & Investments round table, the increasingly complex challenges facing institutional investors today are helping investment consultants add muscle to a business model that has long been the 99-pound weakling on the financial beach.
That trend, years in the making, has gotten a boost from the financial crisis that erupted in 2008, sparking a noticeable pickup in demand for higher-fee services such as implemented consulting, participants said.
“The business has changed incredibly,” said Richard M. Charlton, chairman and CEO of NEPC LLC in Cambridge, Mass. He cited the capabilities in accounting, risk budgeting, operational due diligence and alternative investments needed now by investment consultants to deal with challenges confronting institutional investors that have “never been more complex and demanding.”
The upshot: margins for Towers Watson & Co.'s investment consulting business, which once paled in comparison to those of its bigger actuarial consulting operations, have pretty much pulled even over the past five or six years, said John J. Haley, chairman and CEO, who previously served as president, chief executive and chairman of Watson Wyatt Worldwide, which recently merged with Towers Perrin.
“The good news is that we were able to improve our margins by a couple of percentage points (in) 2009 over 2008,” said Jeffery J. Schutes, a worldwide partner with Mercer Investment Consulting Inc., at the round table, held Feb. 16 in New York.
The panelists said the present moment is both one of flux for institutional investors and an opportunity for investment consultants.
After the recent market debacle, there's a real sense among institutional investors that they need people “to help them turn over the rocks and really find out what's going on underneath,” with the understanding that there'll be costs attached to getting that kind of help, said former Commonfund Chairwoman Myra R. Drucker, who serves on the boards of various pension funds, endowments and foundations.
That quantum leap in institutional investor demand for risk controls should prove a conducive environment for investment consultants, the industry veterans agreed.
Towers Watson's average investment consulting fee — in essence, “the price of admission to be able to deal with lots more complex things” on behalf of clients — has gone up significantly, noted Mr. Haley.
“The whole model has moved upstream” at an extremely rapid pace over the past 18 to 24 months, said Mr. Schutes.
One example: Demand, from corporate clients in particular, has surged for investment consultants to take on decision-making, or “implemented consulting,” roles in overseeing their pension funds, as recent market volatility made clear the pitfalls of merely providing advice at quarterly investment committee meetings.