Alternative investment consultants that are free of conflicts are an increasingly rare breed, continuing to be picked off by consolidation, initial public offerings and the addition of money management services.
Rising competition, client demands and downward pressure on consulting fees have altered the alternative investment consulting universe. Consultants are now offering commingled funds as well as boosting discretionary management. And the larger consulting firms are getting larger by acquisition. IPOs could present problems as well if the market values a publicly held consulting firm based on its fees coming from assets under management rather than consulting fees.
Just this year, Stepstone Group, which started out as a private equity consulting firm and now manages $66 billion in assets, went public. Aksia LLC is buying real estate consulting firm Alignium LLC with the ink barely dry on its acquisition of private equity consultant TorreyCove Capital Partners LLC. And Aon PLC is merging with Willis Towers Watson PLC. Among Aon's list of businesses is the iconic real estate consultant Townsend Group, which in the last several years started managing commingled funds and offering other discretionary money management. StepStone, Aon and Townsend executives declined comment.
While some asset owners are taking steps to understand potential conflicts among their consultants, industry experts said, it's not a easy thing to do.
"I believe that conflicts of interest are a real problem in the investment industry," said Keith Ambachtsheer, Toronto-based president of KPA Advisory Services Ltd. "They are spawned by asymmetric information between buyers and sellers of investment consulting services, with the sellers knowing more about what they are selling than the buyers know what they are buying."
Consultants have a fiduciary duty to provide "unbiased, unconflicted advice," he said.
"This becomes impossible if they stand to gain from their recommendations," Mr. Ambachtsheer said. "Any client that hires a conflicted consultant is probably not aware that the advice they are getting is tainted advice. ... Thus, they pay too much for advice of little value," he said.