Consulting industry shifting beyond its traditional client base

Investment consultants are amping up their efforts to find clients outside their traditional institutional base, as they face a declining pool of corporate defined benefit plans.

Investor groups targeted by the consulting industry include family offices; private wealth management; and registered investment advisers and broker/dealers.

The stark reality, investment consultants said, is that the number of existing corporate defined benefit plans continues to shrink with a steady stream of plan closures and liability and asset transfers, such as the decision by Bristol-Myers Squibb Co., New York, to terminate its $3.8 billion U.S. pension plan and transfer a portion of its liabilities through a group annuity contract.

Adding to their woes, consulting firm executives stressed the level of traditional bread-and-butter-manager search activity has slowed significantly, thanks in part to the increase of advice being offered by money managers and a big bump in the amount of assets managed internally by public pension funds.

"It's fair to say that there are no new pension funds being created," said Jason Schwarz, president of Wilshire Funds Management, a division of Wilshire Associates Inc., Santa Monica, Calif. That pushed the firm to look for investors outside the institutional investor universe.

Among other large consulting firms that have broadened their client bases to alternative sources of consulting revenues are Aon Hewitt Investment Consulting Inc., Cambridge Associates LLC, NEPC LLC and Verus Advisory Inc.

In terms of assets under advisement by the 10 largest consultants, only Chicago-based Aon Hewitt reported a decline — 16.2% in the year vs. 33.4% in the five years ended June 30 — to $3.118 trillion, according to data provided for Pensions & Investments' annual consultant survey.

In aggregate, AUA of the 10 biggest investment consultants increased 2.7% in the year ended June 30 and 27.8% over the five years to a total of $30.1 trillion.

Despite aggregate growth in AUA, data from P&I's consultant survey showed the number of institutional retainer and non-retainer clients served worldwide by the 10 largest consultants fell 21.8% to 5,780 in the year ended June 30, a decline of 27.1% from five years earlier. The actual decline over the one- and five-year periods might be lower because Aon Hewitt did not report institutional client numbers as of June 30.

Wilshire's Mr. Schwarz noted the firm has a large investment consultant practice with $1 trillion of AUA for traditional asset owners, but also has supplemented that business through investment consulting and advisory services for financial intermediaries, including broker/dealers, registered investment advisers, defined contribution record keepers and insurance companies for assets of $184 billion.

This area is one of the firm's largest investment practices, Mr. Schwarz said, adding: "We realized that these areas of the investor universe needed and were clamoring for institutional-quality investment advice and services including portfolio construction, manager research and selection and investment policy development."

The firm also has developed a strong partnership business with large record keepers such as Fidelity Investments, John Hancock Retirement Plan Services and Principal Financial Group and provides fiduciary services such as investment advice and portfolio construction to small 401(k) plans.

Unlike the corporate defined benefit plan market, "the corporate defined contribution plan market is growing steadily," Mr. Schwarz said.

Like many investment consultants, Wilshire has embraced money management to diversify its business and revenue. The firm managed $8.8 billion with discretion for asset owners and $52 billion for intermediaries as of June 30.

About one-third of Cambridge Associates' business now comes from offering institutional-quality consulting services to family offices and wealthy private clients, said Deirdre Nectow, managing director and head of global business development and client service for the Boston-based firm.

She said the firm sees the biggest growth opportunities in Asia, particularly from China, noting "there are many wealthy families now in China, much of it new wealth that will be ready for institutional-style portfolios," Ms. Nectow said.

Cambridge Associates also has diversified, managing $33.2 billion in discretionary, customized separate account strategies as of June 30. AUA as of the same date was $291 billion.

Private-client assets are a focus for Aon Hewitt because they represent a big opportunity as wealth is transferred from defined benefit plans through lump-sum payments and 401(k) plans, said Russell K. Ivinjack, senior partner of the firm's investment consulting business, who is based in the firm's Chicago headquarters.

"We see this as a systematic flow of assets as individuals retire and look for professional management of their wealth post-retirement," Mr. Ivinjack said, adding that Aon Hewitt's work in this area is consultative and focuses on asset modeling, portfolio construction and manager selection.

Aon Hewitt also is partnering with financial intermediaries to offer institutional-level investment for their mass-affluent and high-net-worth clients and has increased internal capacity with specialists well versed in working with wealthy clients.

"There's a different cadence to how you communicate with family offices and wealthy clients," Mr. Ivinjack said, adding there are "many parallels between institutional investors and family offices," as the latter have hired chief investment officers and are more focused on asset modeling, portfolio construction and objective-based strategies.

Family office CIOs are also familiar with alternative investments, and there's increased demand for private equity, real estate and hedge fund strategies.

Aon Hewitt managed a total of $158 billion in discretionary assets as of Sept. 30.

NEPC also has been increasing its capacity to serve family offices through a dedicated private wealth client group based in Portland, Ore., said Michael P. Manning, managing partner, who is based in the firm's Boston headquarters.

NEPC has had to adapt its investment consulting process for family offices to consider the tax efficiency of investments and generally avoid high-turnover strategies, Mr. Manning said.

The firm has experienced willingness from money managers to adapt to the needs of family offices, he said, stressing "the family office market will continue to become a more and more important client for us and money managers."