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Special report

Consulting firms answer asset owner calls for accountability

Consultants push to boost business even as more feel feet held to the fire

Michael Rosen
Michael Rosen said clients value consultants more, but also hold them more accountable.

Asset owners increasingly are demanding greater accountability from their investment consultants — either with manager recommendations or through outsourced chief investment officer services — in the current low-return environment.

That demand is pushing consultants to increase scale, in turn creating more M&A activity — witness Westwood, Mass.-based Meketa Investment Group Inc. absorbing Disabato Advisers LLC, Chicago, and the announced merger of Verus Advisory Inc., Seattle and Strategic Investment Solutions Inc., San Francisco. Both deals were announced in one week in October.

All told, even as asset owners rely more on consultants, consultants have to be more aggressive to prove their value to clients.

“Initially, investment consultants were primarily scorekeepers that were retained to tell plans how they did,” said Stephen Cummings, head of North America investment consulting at Aon Hewitt Investment Consulting Inc. in Lincolnshire, Ill. Aon Hewitt had $4.019 trillion in worldwide institutional assets under advisement as of June 30, according to Pensions & Investments data.

The role then evolved over the years to consultants being an extension of asset owners' investment team, helping “plan sponsors solve problems that they can't on their own in-house,” he said.

Providing institutional asset owners with investment management consulting services remains investment consultants' bread and butter. In fact, it's become more so this year.

Not only did the vast majority of total revenues for the 108 consultants surveyed — 82.8% — come from investment management consulting services for institutional asset owners, but also that number has grown since last year, according to P&I's annual survey of consultants. In the 2014 survey, 80.8% of revenues came from institutional advice-only services.

As a percentage of total revenues, the amount that came from investment outsourcing went down in the 12 months ended June 30, to 6.7%, compared with 9.1% in the year earlier period.

Managing funds of funds and/or separate accounts became a larger slice of the pie, consisting of 2.7% of consultants' revenue, up from 0.8% in 2014.

Michael Rosen, founder and CIO at Angeles Investment Advisors LLC, Santa Monica, Calif., said in a phone interview: “Since the crisis, the advice and analysis of consultants is more greatly valued. But at the same time, (we're) more likely to be held accountable for that advice.”

Mr. Rosen explained that for Angeles, the greater accountability comes from the increase in OCIO mandates it has received — investment outsourcing now accounts for more than half of Angeles' business and has been steadily rising.

He added that, in addition to the operational and administrative benefits that come from an investment consultant, he thinks the growth in the OCIO business is in part “a reflection of the desire for institutional investors to have an adviser with great accountability.”

Angeles Investment Advisors had $27.01 billion in worldwide institutional AUA as of June 30.

Rich Nuzum, investments business leader-North America at Mercer LLC, New York, said something similar about consulting services in a separate phone interview.

“We're seeing clients hold their consultants responsible for the performance of the managers that we recommend vs. their benchmark,” Mr. Nuzum explained. “That's the biggest challenge: being able to demonstrate the value add.” Mercer advised $9.109 trillion in assets as of June 30.

Janet Becker-Wold, senior vice president and manager of Callan Associates Inc.'s Denver fund sponsor consulting office, said: “The world has evolved into those two consulting models — one where you run the plan and one where you advise the plan.”

Ms. Becker-Wold added that some clients “want consultants to do everything, and they go into the outsourced CIO model. They don't tend to be the bigger clients.” Meanwhile, larger clients typically “want to maintain control” and are often reluctant to deploy the OCIO model. Callan's worldwide institutional AUA was $2.04 trillion.

Blurred line

Several consultants interviewed agree that one of the biggest challenges within the industry is the continued blurring of the line between consultants and money managers, leading to more competition.

“Increasingly, the asset managers are giving a deeper level of advice to clients,” said Andrew McCollum, managing director at financial industry research and consulting firm Greenwich Associates, Stamford, Conn. “At the same time, consultants are stepping on the toes of the asset managers in adding discretion (through OCIO). So the challenge will be coming into closer competition with the asset management firms who oftentimes have greater resources,” leading to a greater need for cooperative competition between managers and consultants.

Aon Hewitt's Mr. Cummings agreed: “We're competing against both consultants and managers” with multiasset capabilities.

In addition to growing competition, the broadening of the investment landscape is another big challenge with which consultants have to deal.

“You can't just be an expert in stocks and bonds. You have to understand private equity, commodities, hedge funds, you have to be very, very broad in expertise,” said Mr. Cummings. “This has grown considerably since the recession. Making sure you've got good solid deep expertise in all asset classes is a big challenge.”

Scale a growing factor

With the investment landscape becoming more complex and the demands of investors becoming increasingly varied, scale is a growing factor in the investment consulting world. Clients need consultants to have large staffs in order to research multiple strategies and meet with multiple managers.

“Scale is huge right now. Having big resources is vital,” said Ms. Becker-Wold, explaining that, as a result of this need for scale, smaller consulting firms are either merging with or being bought by larger corporate parents that have deeper pockets.

Tim Barron, chief investment officer at consultant Segal Rogerscasey, added: “There are some advantages to scale. Scale can improve your bottom line.”

When Towers Watson & Co. and London-based Willis Group Holdings PLC in June announced plans to merge, Towers Watson Chairman and CEO John Haley said in a news release that he saw “numerous opportunities” to “enhance our growth profile.”

According to Mr. Barron, “consolidation makes sense” in the current investment landscape where “they're not building any new employee benefit plans” and “not creating new foundations or endowments.” So, in an environment in which consultants and asset owners are relying upon asset growth from markets appreciating, M&A is often the best method. Segal Rogerscasey had $178 billion in worldwide institutional AUA.

Mercer's Mr. Nuzum said he has definitely noticed an increase in M&A activity. Part of it, he thinks, goes back to clients looking for demonstrated added value for manager research and implementation.

“That's hard to do if you don't have a full-time group of people who can meet with all the managers and figure out who has the competitive edge. That's not something that a small firm can do. So there's a pressure for a firm to have scale.”

Another reason

Another reason scale is important is when investors want to invest in “more innovative, esoteric areas of the marketplace,” said Steve Carlson, head of investment, Americas, at Towers Watson, in Chicago.

“You need the boots on the ground in the regions you do the research in. You need boots on the ground in Asia, Europe and Australia, not just in the U.S.,” Mr. Carlson said. “We also see it's critical if it's a multinational client.”

Towers Watson advises on $2.2 trillion.

Not everyone agrees, however, that consultants need to be big in order to compete in the current landscape. Andrew Junkin, Broomfield, Colo.-based president of Wilshire Consulting, for example, says that when implemented properly, the consulting business model is not particularly scalable, because it is customized.

“Some organizations have chosen to build as much scale into their organization as possible. From a business standpoint, that might be the right call. But is that the right call for the client? I'm not sure,” said Mr. Junkin.

Mr. Junkin added that although a certain amount of scale is needed to compete globally, “there are some drawbacks to being the behemoth in this industry.” When you're the biggest consultant in the industry, your clients may not feel “that you're taking their interests to heart.” Wilshire advises on $1.013 trillion in assets.

A number of consultants acknowledged there's a place in the industry for the boutique consultant. Mr. McCollum pointed out, for example, that smaller consulting firms can often provide clients access to their senior consultants.

Mr. Cummings said that, although the current environment appears to favor the bigger firms and M&A, “There will always be room for boutique firms that focus on one particular asset class or one particular type of problem.”

“Some of our larger friends say you need to be a global firm, but I don't think that's true,” said Mr. Rosen. “I think good firms take all shapes and sizes and the value that we bring is not consigned to a particular kind of organization or structure.”

Looking to where the industry is headed, Ms. Becker-Wold said she thinks the consulting world will become “increasingly barbelled” where large firms like Callan, Wilshire and NEPC LLC will continue to become larger, while smaller organizations will continue to take on smaller clients that “don't need the Cadillac.”

“That'll be more bifurcated. The big will get bigger. But there'll always be a role for the smaller consultants,” she said.

This article originally appeared in the November 30, 2015 print issue as, "Firms answer calls for accountability".