Traditional firms use new units as way to boost alts businesses
Just as consultants are moving into money management to boost revenue, traditional money managers with expanding alternative investment businesses are adding the notoriously low-profit business of investment consulting.
Larger institutional investors increasingly are hiring money managers as consultants in specialized assignments such as developing multistrategy, multiasset-class portfolios.
That opens a window of opportunity for traditional stock and bond managers to showcase their new alternative investments business units.
But there could be conflict-of-interest issues, even when managers aren't seeming to charge for the advice or aren't recommending proprietary investment strategies, industry executives say.
In the past 14 months, large traditional managers including Neuberger Berman Group LLC, Prudential Financial, New York Life Investment Management, and Deutsche Asset and Wealth Management have added consulting services. Each of the firms hired consultants to run the new units.
Driving the trend is a desire to deepen client relationships, which could lead to opportunities to not only provide money management but also property and casualty insurance or banking services. A consulting unit can also help to establish a traditional money manager's expertise in alternative investments.
Prudential formed its multiasset-class solutions business about a year ago to provide investment advice to clients, not to sell strategies, said Michael Schlachter, a managing director and head of multiasset-class solutions for Prudential Investment Management, Prudential Financial's money management arm.
Mr. Schlachter left Santa Monica, Calif.-based consulting firm Wilshire Associates Inc. to join Prudential 11 months ago. The group is set up to advise institutional investors on such issues as asset allocation, investment education, portfolio construction, dynamic derisking and hedging. Consulting could include suggesting investment strategies such as public fixed income, private debt or real estate. “Our solutions group is one of many ways our clients can tap into our knowledge and expertise,” Mr. Schlachter said. “We feel we are a valuable resource for our most important clients ... We're adding our voice to the room.”
Prudential was encouraged to offer consulting services by large institutional investors that “really want to rely on their most trusted investment partners for more than just a portfolio management relationship,” Mr. Schlachter said.
Formed around same time
Deutsche Asset & Wealth Management formed its consulting unit around the same time, hiring J.J. Wilczewski as managing director and head of the institutional client group in the Americas five days before Prudential hired Mr. Schlachter. Mr. Wilczewski joined from Aon Hewitt Investment Consulting Inc., and previously had worked at Wilshire.
Mr. Wilczewski said Deutsche's new client solutions unit was launched to offer advice to clients and offer recommendations involving Deutsche investment strategies.
The trend is part of a convergence of money manager and consultant responsibilities, he said.
“Some consulting firms are trying to become asset managers and asset managers are becoming consultant-like, especially when it comes to alternatives,” which are gaining a larger proportion of investors' portfolios, Mr. Wilczewski said.
“The breadth of alternative investments can be daunting. To provide products and also education is very important,” he said. “We can carve out a client base by being a trusted educator.”
DeAWM's client solutions group provides such services as asset allocation and asset-liability modeling for clients. In May, it rolled out another service, an outsourced chief investment officer business, “A-CIO office” to help clients invest in DeAWM's alternative investments strategies. A-CIO is not a consulting service, but a sales model.
“Rather than selling a single product, let's create a robust multiasset-class, outcome-oriented solution that may contain a combination of up to five to six of our products,” Mr. Wilczewski said.
Consultants and other money managers offering consulting services say some managers are offering consulting services as a loss leader, providing them for free or as part of a bundle of services. Some managers like Deutsche do not have a fiduciary relationship because the consulting group is a support group that does not have its own clients.
Michael Rosen, CIO of Santa Monica, Calif.-based consultant Angeles Investment Advisors LLC, said providing consulting at no or minimal cost can give managers an edge.
“I've run into money managers (at finalist presentations for consulting services) and my peers have as well. The argument is mostly about fees,” Mr. Rosen said. “So prospective clients say "I can get all my consulting for free and I have to pay you and so I will go with them because they are cheaper.'”
But executives at OCIO and hedge funds-of-funds firm Clearbrook Global Advisors LLC, New York, say these cheap consulting contracts carry another kind of cost.
“Sometimes a plan sponsor will make the decision to work with one provider with proprietary products because the provider is saving them on costs — charging for investing and throwing in consulting for free or throwing in custody for free,” said Thomasin Bentley, managing director at Clearbrook Global Advisors. “They can write one check ... It looks cheaper but in the long run they are sacrificing performance.”
Big managers cannot outperform in all of the strategies they offer, said Timothy C. Ng, chief investment officer of Clearbrook.
All of this points to a number of conflicts of interest when a manager also provides consulting services. “Investors are not necessarily getting the best recommendation that is at the cheapest cost,” Mr. Ng said.
Clearbrook does not have the same conflicts of interest issues because the firm does not directly manage money, but advises on and constructs portfolio strategies using independent managers.
Mr. Rosen said offering consulting services for free “points to the conflict.”
“It is not logical that a service or product is provided for free in a capitalistic economy. It makes no sense,” Mr. Rosen said. “If it is provided for free, why is that? How are they making money? It is not actually free.”
The conflict for managers that are recommending their own investment products is fairly clear, he said.
“The issue with proprietary funds from money management firms is that there is not a single money manager that excels across every single asset class,” Mr. Rosen said.
What's more, the manager's asset allocation recommendations could potentially be driven by fees they would earn on the underlying funds.
Even if managers are not recommending their own funds and investment strategies, they might have relationships with other firms such as brokerage firms or vendor relationships where the money manager is selling investment products to other money managers. These relationships could influence a manager's advice, Mr. Rosen said.
Money managers that are offering consulting contend there is a wall between their consulting and money management arms that protects against potential for conflicts. Most of the parent firms are set up as a conglomerate of separate boutiques that operate relatively independently with access to the parent firm's resources, they say.
Indeed, Mr. Schlachter stressed Prudential's new consulting arm was not formed to expand Prudential's investment management business but to offer a service to its most valued clients.
Prudential does not plan to compete with consultants, he said, but to complement them.
“We have done very well for our customers from an investment perspective and a lot of that is based on our investment skill ... clients really want to tap into that,” he said. “Consultants are good at sticking with a long-term path.”
However, clients will sometimes solicit trusted money managers' opinions and market insights when the asset owner wants to form strategic portfolios, Mr. Schlachter said.
This article originally appeared in the June 29, 2015 print issue as, "Managers add consulting to grow client relationships".