The institutional investment consulting industry is seeing increased consolidation in many forms for many reasons, while more investors are turning to outsourced chief investment officer services.
Multiple major merger and acquisition deals have taken place in the last three months alone. In November, Goldman Sachs Asset Management announced its intention to buy Rocaton Investment Advisors LLC, taking over its $600 billion in assets under advisement.
And in mid-August, Mercer announced plans to acquire Pavilion Financial Group's investment consulting business as well as Summit Strategies Group's defined contribution consulting and outsourced CIO businesses. At the same time, AndCo Consulting agreed to purchase Summit's public defined benefit plan consulting business.
Mercer ranked No. 1 overall with $11.632 trillion in assets under advisement as of June 30, up 6.2% from the year before. The consulting giant's AUA should grow by roughly $845 billion from its recent acquisitions, widening its lead on Aon PLC, which advised on $3.118 trillion in assets as of June 30.
"In the long run, the M&A game is probably going to continue," said Andrew H. Junkin, president of Wilshire Consulting. "I'm not sure that's so great for the industry."
Consolidation may result in more homogenization, but the consulting business is best when fully customized to each client, he said.
"Is this the best thing for the client or the best thing for the provider to build their own business? Sometimes the answer is not always clear to me," Mr. Junkin added.
Data from Pensions & Investments show the overall U.S. institutional tax-exempt AUA was flat for the year — $20.76 trillion as of June 30, up only 1.3% from a year earlier.
Investment consultants speaking with P&I agreed that consolidation will continue. However, they had varied explanations as to why.
"There are multiple influencers that are causing the consolidation," said Steve Carlson, head of investment, Americas, at Willis Towers Watson PLC, in Chicago. Some of the primary influences leading to further consolidation include consulting firms trying to maximize their margins; owners of firms established in the 1980s and '90s looking to retire and cash out; firms looking to expand their offerings and capabilities and small- to midsized-consulting firms looking to be acquired to gain scale.
Mr. Carlson said some deals, such as Mercer's acquisition of Summit and Aon's January acquisition of The Townsend Group for $475 million, are being done so one consultant can expand its capabilities within a specific asset class. In the case of Mercer, it was alternatives; for Aon, it waTownsend Group for $475 million, are being done so one consultant can expand its capabilities within a specific asset class. In the case of Mercer, it was alternatives; for Aon, it was real estate.
"Clients are seeking high-quality advice on alternatives," said Richard Nuzum, New York-based president of Mercer's global wealth business, in a telephone interview. "Alternatives are attractive but also risky."
Mr. Nuzum pointed out that although alternatives are becoming increasingly attractive in a low-return environment, they require expert advice. "There's no passive investing with alternatives," he said. "You can't just stick this money in an alternatives index fund."
Wilshire's Mr. Junkin said something similar about investor appetite for alternatives in a separate phone interview. "An ongoing push into alternatives has been going on for more than a decade," he said. "Consultant firms are trying to solve the dilemma for achieving returns in a low-return environment."