Consultants target foothold in fast-growing retail market

Updated with correction

Traditional and alternative investment consulting firms increasingly are diversifying their predominantly institutional client bases to tap even further into the faster-growing retail marketplace.

Industry observers said a cadre of consultants are seeking to offer their standard services — including portfolio construction, asset allocation, manager selection, due diligence and outcome-oriented strategies managed with and without discretion — to financial intermediaries including wealth managers, retail investment advisers, family offices, broker-dealers and money managers.

Among the investment consultants working with financial intermediaries to various degrees and/or have launched their own retail funds include Cliffwater LLC; Mercer; Russell Investments; StepStone Group Inc.; and Wilshire Advisors LLC.

"Most investment consultants are well embedded in the high- to midsized asset owner segment — which is mostly populated by defined benefit plans — offering traditional consulting services. They have great market share, but this client segment is going away" as DB plans continue to close or transfer pension risk to insurers, said William "Bing" Waldert Jr., managing director and head of U.S. research at Cerulli Associates Inc., Boston, in an interview.

"The retail market is growing much faster than the institutional market," Mr. Waldert said, noting that the approximately $500 billion that retiring employees transfer annually to retail firms from defined contribution plans represents a good opportunity for consultants to put their portfolio and manager due diligence expertise to work.

He added that "asset manager selection is in high demand by wealth management firms as they figure out how to produce consistent outcomes for retail investors. Investment consultants can certainly help with this."

Tyler Cloherty, senior manager and head of the knowledge center for Casey Quirk, a practice of Deloitte Consulting LLP, New York, said in an interview that the strong demand from financial intermediaries for consulting services is a trend likely to continue.

"For retail intermediaries, the nature of financial advice has pivoted from investment-performance centric to outcome-oriented approaches, which include more financial planning and digital interfaces," Mr. Cloherty said, stressing that the new services financial intermediaries require that consultants also pivot in order to provide them.

Large investment consulting firms said they have been working with financial intermediaries for years, but executives agree the pace of growth in the retail channel is on a tear with little sign of slowing.

Wilshire Advisors, Santa Monica, Calif., has been active in the retail advisory business for 15 years, but it's now one of the firm's fastest-growing businesses, said Jason Schwarz, president and chief operating officer, in an interview.

"We had a bit of a head start on working with retail intermediaries and the pie is getting bigger. For us, retail is the halo that sits on top of our work with the largest institutional investors," he said.

Over the years, Wilshire expanded from its traditional consulting services to offer similar services to financial intermediaries Mr. Schwarz said.

Mr. Schwarz declined to specify the financial impact of the firm's intermediary business but noted that it's "a meaningful contributor" to the firm's bottom line.

Wilshire had assets under advisement of $1.4 trillion and assets under management of $87 billion as of March 31. Of Wilshire's AUA, $229 billion was from financial intermediaries and $70 billion of AUM was managed for retail entities.

Consultants are finding themselves in an in-between position regarding their client bases.

Russell Investments has seen the lines ''blurring between institutional and wealth management," said Alexander Rabinovich, Chicago-based head of strategic accounts, in an email.

Mr. Rabinovich said wealth management firms, for example, now have complex needs beyond manager selection and investment solutions and are turning to investment consultants for help with tax management, sustainable investment, income generation and other specific investment outcomes.

He added that Russell Investments has seen "increased demand from large- and midsize investment platforms, broker-dealers and wealth managers for OCIO mandates, tax-managed model solutions and personalized overlay strategies. All of this originated from our decades of work with institutional clients."

Russell had assets under advisement of $2.8 trillion as of Dec. 31 and assets under management of $327 billion as of March 31. Russell did not provide the amount the firm manages for retail-oriented entities.

Casey Quirk's Mr. Cloherty said a newer area of demand from financial intermediaries is for alternative investment strategies and ESG investment consulting services.

"There is expansion in these areas in the retail market and consultants increasingly are providing strategy and manager information as well as packaging up model portfolios and launching investment funds largely aimed at the wealth management channel," Mr. Cloherty said.

For example, Philadelphia-based Macquarie Investment Management partnered with Wilshire in 2020 to provide manager selection and other services for a Macquarie-branded alternatives fund, which includes private equity, private debt, private real assets and alternative yield targeted for mass-affluent investors.

"There is a serious drive to bring liquid and semi-liquid alternatives to all of the retail channels. Distributors are hiring consultants to create alternative funds," said Stephen L. Nesbitt, CEO of alternative specialist consultant Cliffwater LLC, Marina Del Rey, Calif., in an interview.

"Consultants aren't making enough from advisory fees, and creating alternative funds provides meaningful money from a part of the market that can be difficult to access," Mr. Nesbitt said.

Cliffwater launched a direct lending fund of funds that the firm markets to independent wealth management firms and to some small institutional investors. The fund now totals $2 billion.

Cliffwater doesn't offer advisory consulting services to intermediaries, Mr. Nesbitt said.

As of May 31, Cliffwater had $85 billion in assets under advisement and $5 billion in discretionary assets under management.

StepStone Group, New York, an alternatives consultant, has provided customized investment solutions and access to the firm's institutional funds to wealth managers and family offices for 10 years and these retail channels remains a growth priority for the firm, said Jason Ment, president and co-chief operating officer, in an email.

The company also manages $500 million in 40-Act tender offer funds for accredited U.S. retail investors.

In 2019, the firm launched a dedicated money management company, StepStone Conversus LLC, Charlotte, N.C., to manage a private markets fund of funds for high-net-worth, small institutional and accredited investors.

As of Dec. 31, StepStone had assets under advisement of $253 billion and assets under management of $80.5 billion.

Spokesman Chris Gillick said in an email that the firm doesn't break out its AUA and AUM by client type.