Consultants see rise from clients eager for advice

In the current climate, institutional investors have relied more heavily on consultants for both traditional advice and outsourced CIO services, a trend that will no doubt continue, according to forward-looking predictions from sources and annual data from Pensions & Investments' investment consultant survey.

P&I's annual survey of the largest investment consultants found that institutional assets under advisement grew 3% to $42.65 trillion over the year ended June 30, while U.S. institutional tax-exempt AUA grew 4% to $23.59 trillion, in spite of rocky markets and equity drawdowns earlier in the year.

Over the five-year period ended June 30, institutional AUA grew 24.6%, while U.S. institutional tax-exempt AUA grew 28.5%.

Jamie Eckert, Chicago-based senior director, investments, U.S. head of client service at Willis Towers Watson PLC, said many corporate plan sponsors, in particular, are "focused on the financial strain and business distress as a result of COVID-19 and cannot afford to spend as much time managing their plans during a time when they cannot afford not to spend time on it."

For many corporate clients, the solution has been to outsource, Mr. Eckert said.

Among defined benefit plan sponsors there has also been a move to, or interest in, adding a diversifying asset class to their portfolios, often by exposure to alternative credit strategies — such as high yield, loans, securitized credit, sovereign credit and emerging market debt — through both OCIO and traditional advisory mandates, she added.

Alternative credit "is where DB plan sponsors are going first to diversify as many have not yet built out their credit exposure and it is relatively easy to implement vs. alternatives for consideration such as private markets," Ms. Eckert said. "Many corporate plan sponsors lack the time, expertise and governance to execute a fully diversified and opportunistic alternative credit portfolio and find it much easier to use a fund-of-fund sleeve solution."

"On the DC side, we're seeing more strategic reviews of asset classes already in place, but we're not seeing the addition of asset classes like I've noted on the DB side," Ms. Eckert said.

OCIO assets grew at an even faster pace than institutional AUA at the largest consultants, reaching $1.51 trillion as of June 30, up 10.6% over a year earlier, according to survey data. Over the five-year period, OCIO assets grew significantly, up 83.5%.

Kevin Quirk, a Stamford, Conn.-based principal at Casey Quirk, a practice within Deloitte Consulting LLP, noted of the past several months: "Like in every significant crisis I've seen, these are exactly the times that clients tend to lean much more heavily on their investment consultants."

"A lot of the conversations we've had with investors, especially given the move to a virtual environment, is they've had a significant uptick in the interactions they've had with (their consultants). In the last six to eight months since this (pandemic) began, there's been an uptick in the interactions and the demand for what consultants (offer)," Mr. Quirk added.

New York-based Mercer Investments LLC remained the largest consultant by worldwide institutional AUA, with $15.96 trillion as of June 30, up 6.1% over a year earlier. Aon Investments USA Inc., Chicago, the second-largest consultant in this universe, saw its institutional AUA drop 2.3% to $3.44 trillion over the period, though it retained its ranking position.

Willis Towers Watson also remained the third-largest consultant by institutional AUA, with assets staying flat over the year at $2.6 trillion.

Of note, Aon and Willis Towers Watson announced in March the firms will merge their businesses in an all-stock $30 billion deal expected to be completed in the first half of 2021. The combined firm will operate as Aon. Even as a merged firm, Aon's institutional AUA would still fall well short of half of Mercer's figure.

Regarding its decline in institutional AUA over the year ended June 30, an Aon executive attributed the 2.3% drop to a combination of factors: the pandemic slowing new-business activity, defined benefit risk transfers resulting in less assets managed for clients, and equity market drawdowns experienced earlier in the year.

Stephen Cummings, the Chicago-based global head of Aon Investments USA Inc., said that after COVID-19 hit globally, "new business activity was very much slowed down."

"Clients that were thinking about adding a service, or changing a vendor, or moving from a 401(k) plan advised by (one firm) to an independent consultant, for instance — all of that activity fell off a cliff in the first half of the year," Mr. Cummings said.

After June, however, asset owners started operating again "in this new normal," he noted. "The (business) pipeline started to flow in the middle of the year with clients starting to return to a sense of normalcy," he said.

Rich Nuzum, the New York-based global president for investments and retirement at Mercer, separately noted an increase in defined benefit risk transfers over the year ended June 30, that may have caused more asset owners to move to OCIO structures.

"Up until the coronavirus hit, we were seeing pretty record volumes of defined benefit risk transfers," Mr. Nuzum said. "When a DB plan is frozen or closed, that tends to be a catalyst to go to an OCIO."

"When interest rates rise, it gets easier to do the risk transfer. When rates fall it gets harder. Rates had risen from all-time historic lows, at least from June 30, 2019. Average funded status had risen and more plan sponsors were able to do risk transfers up until this March," Mr. Nuzum explained.

P&I survey data found that a majority of consultant revenues — 81%, about the same as last year — continued to come from traditional investment management consulting services for institutional asset owners. Despite the fast pace of growth of OCIO assets at firms, investment outsourcing accounted for 6.6% of consultants' total revenues in the year ended June 30, up only slightly from 6.1% a year earlier.

Mercer's Mr. Nuzum believes that smaller consultants, in particular, are being squeezed by fee pressures within their OCIO business and don't have the alternatives expertise to compete with larger OCIO consultants specializing in higher-fee asset classes.

"Most of the traditional consultants don't have strength in alternatives (and) aren't able to play in the most profitable area of the industry," Mr. Nuzum said.

Additionally, larger firms have the benefit of "aggregate buyer power," he added.

"The smaller (traditional) players are getting crushed because they don't have the scale to buy in bulk and they have to pay more for the underlying active management. Their clients have to pay more (for these services), so they aren't going to pay as much for the OCIO layer too," Mr. Nuzum said.

Mercer had $305.9 billion in AUM as of June 30, defined in the survey as assets in funds of funds or other discretionary money management products. The firm's assets in this universe increased 8.1% over the year.

In light of the pandemic, sources said that consultants will ultimately be faced with how they will evolve their business model and interactions with clients due to remote work needs and the higher priority placed on technology.

Mr. Cummings at Aon said he's urged his team "to not return to doing business as we did before the pandemic."

"I think the industry is going to shift in the way we serve clients, but also in the way we monitor our investment managers because we've had to do that remotely since March," he explained. "We're learning a lot that's going to cause us not to bounce back to 'business as usual' in 2021.'

He believes that, ultimately, clients will determine if airplane travel will return to previous levels for consultant board meeting visits. Most institutional investors have requested remote meetings during the pandemic, but there have been a couple of public fund clients that have continued to hold in-person meetings with Aon representatives, mainly due to local regulations requiring open board meetings as these plans still figure out a way to do so electronically.

Mr. Cummings also sees an opportunity to interact in more robust ways with clients through technology, for example, by normalizing tech-enhanced sharing of thought leadership, research or investment ideas.

"Even if we're physically in (board) meetings in six months, we'd like to open our meeting with a quick three-minute video from our CEO, or the head of our global asset allocation team, or me, for instance," Mr. Cummings said.