Investment consultants enjoyed broad gains last year for their advisory and outsourced CIO businesses and expect tailwinds to outpace headwinds for the current year as well.
That rosy view stands in contrast to the top-line results for Pensions & Investments’ latest survey of the industry, which showed a 1% decline in total assets under advisement to $50.55 trillion for the year through June 30. The global institutional portion of that total posted a relatively strong 4.2% gain to $49.93 trillion, while U.S. institutional, tax-exempt AUA edged up 1% to $27.24 trillion.
The year-on-year figures were skewed by the absence of survey responses this year from Bank of America and Goldman Sachs Asset Management. If those organizations' numbers were excluded from the 2023 survey results, both total AUA and global institutional AUA would be up 6.7% for the latest year.
From the vantage point of P&I’s last five surveys, those adjusted numbers moved the industry back in the direction of the bull market gains of 8% to 9% for the two years through June 30, 2021, cut short by the start of an aggressive rate hiking cycle from March 2022. Industry AUA slipped 0.7% for the year through June 30, 2022, followed by a modest rebound of 1.7% the following year.
Over the past five years, total AUA, as well as global institutional and U.S. institutional, tax-exempt AUA, posted growth of roughly 20% apiece.
Investment consultants with OCIO offerings, meanwhile, reported $1.7 trillion in assets under management, an increase of 20% from the year before for the 36 respondents.
Industry executives said a strong year for capital markets overshadowed what, on balance, was a positive story about the mix of tailwinds and headwinds facing their businesses over the latest survey period.
Market gains, including the S&P 500’s 40% run over the past 12 months, made it a great year for clients, while a “Goldilocks moment" for the global economy — marked by a soft landing, full employment and strong growth prospects — proved a favorable backdrop for consultants as well, said Rich Nuzum, executive director, investments and global chief investment strategist at Mercer Investments.
“The traditional investment consulting industry is alive, well, profitable, thriving (and) growing,” Nuzum said.
While defined benefit plans, the traditional mainstay of the investment consulting business, continue to shrink on the back of plan closures and pension risk transfers, growing demand from other segments — including defined contribution plans, pooled employer plans and an ever-expanding universe of foundations and family offices — should help ease the pain, executives say.
For the latest survey, Mercer’s investment consulting business — with an 8.2% gain to $17.56 trillion, and its outsourced CIO business, up 25% to $492.4 billion, padded by its acquisition in March of Vanguard's $60 billion OCIO business — retained the top spots in their respective rankings.
Callan, in second place with a 5.7% gain in AUA to $4.98 trillion, was likewise able to take advantage of tailwinds, including a pickup in RFP activity last year, leaving the firm "on pace for record revenue," said Greg Allen, CEO and chief research officer of the San Francisco-based consulting firm.
Callan reported a total of 559 institutional clients for the latest survey, an increase of 30 on the year, which included 17 defined contribution plans, seven defined benefit plans and five healthcare trusts.
Other leading consulting firms likewise reported strength across a broad range of client segments, including Meketa Investment Group, which held on to sixth place in the overall rankings with a 4.6% gain in AUA to $2.94 trillion.
“Our business had a great 2024,” with growth across public funds, Taft-Hartley union funds, corporates, nonprofits and private markets mandates, as well as both outsourced CIO and nondiscretionary mandates, said Stephen P. McCourt, San Diego-based managing principal and co-CEO of the Westwood, Mass.-based firm.
Meketa aims for steady, measured growth over time, but friendly markets have seen the pace accelerate a bit over the last year or so, McCourt said.
Jeffrey MacLean, CEO of Verus Advisory, likewise highlighted the breadth of his firm’s latest gains, with a 51% surge in AUA to $1.15 trillion lifting the Seattle-based investment consultant's ranking to 10th place from 12th.
“When you peel back the onion … and look at our growth … you would see hospitals, multiemployer plans, corporate retirement plans, health and welfare plans, educational endowments, Native American entities, public pension plans,” MacLean noted.
Private markets research provides a leg up
Meanwhile, executives at top firms tied at least some of their latest gains to being among the industry vanguard at building private markets research capabilities.
Meketa’s early focus on private markets has “allowed us to punch above our weight in terms of the amount of resources and support we can provide clients” that continue to allocate more and more to those alternative strategies, McCourt said.
For most client segments, alternative investments are becoming ever more important and the huge amount of innovation occurring there now makes researching that growing market segment an ongoing challenge, said Nuzum.
And not necessarily a lucrative one, some executives suggest.
Allen noted that in contrast to public markets, researching alternatives is relatively labor intensive, with a revenue model "more like piece work — if you're not actually underwriting (i.e. vetting an alternative strategy on behalf of a client), you're not making any money."
"Net, net, it's probably not dilutive but it's not necessarily accretive either," Allen said.
Fee pressures
Despite the generally healthy environment for consulting firms, executives grappled with at least a few headwinds last year, among them an acceleration of downward fee pressures, particularly for OCIO mandates.
“We’ve certainly seen fee compression in the industry,” driven by more competition and the growing role played by third-party evaluators — independent, boutique firms that run OCIO- and consultant-focused searches on behalf of plan sponsor clients, noted Nimisha Srivastava, head of investments, North America, with Willis Towers Watson.
Those search intermediaries rightfully focus on getting the best outcomes for their clients, often leading to multiple rounds of fee negotiations that drive down prices, Srivastava said.
Some market participants say the falloff in OCIO fees has been dramatic.
Just under a decade ago, as demand for OCIO services really began taking off, the fees an investment consulting firm could garner on an OCIO mandate were about three times that of consulting fees, but today much of that advantage has evaporated, said Uma Kolluri, a principal with Curcio Webb, a Lawrenceville, N.J.-based benefits consultant seen as one of the biggest competitors in the consulting/OCIO search business.
It's not unusual for an OCIO provider, bidding after five years to retain a client, to have to reduce the dollar cost by half, said Callan's Allen.
Michael Kozemchak, a managing director with Michigan-based OCIO search firm Institutional Investment Consulting, said five years ago, plan sponsors with $500 million to $1 billion in portfolio assets were looking at costs of between 10 and 17 basis points to hire an OCIO provider. Today, the costs would be closer to between 6 and 10 basis points, he said.
P&I’s latest survey shows consulting firms’ average revenues attributable to investment outsourcing dropping to 10.6% of total revenues from 12.1% the year before — the biggest change for any business segment. (The next biggest revenue shift, for investment management consulting services delivered to institutional asset owners, was a gain of just under 1 percentage point to 79% of total revenues from 78.1% the year before.)
Market participants differ on how problematic that falloff in OCIO fees could be for the industry.
Callan's Allen, noting the considerable risks OCIO providers take on in managing clients' portfolios, said at some point the question will arise as to whether "you're being compensated for taking that risk."
Kozemchak, by contrast, says even if fees have come down a lot, "these guys are still making a boatload of money."
Srivastava said while a fixation on headline OCIO fees can obscure the costs and benefits of what are highly complex, individualized programs, there are signs of progress on that front.
“What we try to showcase is … here’s the value that we bring, and very transparently showcase the fees,” with a determination that there has to be a floor to make sure “you’re still delivering high-quality solutions,” rather than engaging in a race to the bottom, she said.
“I think slowly, our consulting peers are starting to do the same thing, which … will help sort of reduce this fee compression trend that was pretty prominent last year,” Srivastava said. “I’ve seen a little bit less of it this year,” she added.
Willis Towers Watson held on to fourth place in the latest survey rankings, despite an 8.6% drop in AUA to $4.2 trillion. The consulting giant’s OCIO AUM slipped 2.1% to $167.3 billion.
Srivastava said it was “a pretty decent year for our business,” even if AUA was dinged by pension risk transfers — occurring now for the defined benefit industry at a faster pace in the U.S. market in particular than many people had anticipated — and a decision by one big retainer client to shift to a big asset management firm's OCIO offering.
But if DB totals remain under pressure, other growth segments — including wealth management clients and WTW’s recently launched pooled employer plan business, which has quickly garnered between $500 million and $1 billion — should increasingly act as a counterweight, she said.
Executives say they’re likewise confident their businesses will continue to thrive.
“Consulting has always been sort of trench warfare,” McCourt said. Every year institutional clients are demanding more resources and looking to pay less and less for them, he said. Consulting firms are always challenged in envisioning how they’re going to square that circle but somehow “we always figure it out,” he said.
“It’s just a lot of blocking and tackling, it’s a lot of hard work and it’s a lot of listening to what your clients want…(but) I have a lot of confidence that we’ll continue to get more efficient, continue to provide superior resources to our clients and be fee competitive in doing it,” McCourt said.
