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Special Report: Investment consultants

Current perception of industry big part of consolidation trend

Michael A. Rosen believes consultants need scale to survive because clients now perceive them as offering the same things.

The increased consolidation among traditional non-discretionary investment consultants is the result of the industry being commoditized, said Michael A. Rosen, chief investment officer of Angeles Investment Advisors LLC.

The managing partner of the Santa Monica, Calif.-based outsourced chief investment officer provider said in a telephone interview that investors are perceiving "little distinction among investment consulting firms and have accordingly put a lot of pressure on fees."

If an institutional investor perceives that the advice they get from one traditional consultant is no different from another, "then why pay anyone any differently and just simply put it out to bid to the lowest cost provider?" Mr. Rosen asked.

This fee compression, Mr. Rosen explained, leads to a business model where firms must have scale in order to compete, since that's how marginal costs and fees can be reduced.

"It's a race to the bottom," he said.

Although some traditional consultants have argued that the value they bring to their clients are intangibles such as relationships and customized services, Mr. Rosen isn't buying it.

"If it were true, we'd be seeing higher fees, and an acknowledgment of the greater value the industry is providing," he countered. "And we're seeing just the opposite."

Mr. Rosen stipulated that he's not saying the role of the consultant is not important. But rather "that the value that is being delivered is pretty marginal, based on fees being reduced."

He added: "If the service that were being provided were perceived as adding a lot of value, you'd see the pricing for that service go up. But we're seeing the opposite. And that's what's driving that consolidation."