For decades, investment consulting firms have maintained their perch as the prime gatekeepers of institutional portfolios, advising asset owners on manager selection, asset allocation and portfolio construction.
But with consultants, in their guise as outsourced CIOs, now almost universally bringing their own dogs to the money management fight, the question of who can gatekeep the gatekeepers is taking on growing relevance.
The answer, increasingly, is “third-party evaluators” — boutique firms with expertise vetting OCIO providers and investment consultants that help plan sponsors sift through an ever-growing universe of competitors.
Amid a continued rise in the ranks of retirement plans considering OCIO solutions now, a growing number are seeking outside help in navigating that process - an independent voice, in a sector where incumbent advisors commonly have their own OCIO offerings, to guide them in selecting and monitoring an OCIO, said David Levine, a principal with Washington-based ERISA-focused Groom Law Group.
In what remains a fragmented market, even if everyone is "aiming for the same goal posts," they're looking at different paths to get there, said Michael Kozemchak, a managing director with Institutional Investor Consulting, a consultant/OCIO search firm. "You really need somebody ... that's competent to help a sponsor figure out" who's taking on what mix of investment, administrative and custodial functions, at what fees and with what liability exposures, he said.
At the end of the day, the promise of third-party evaluators is a more efficient search process, OCIO veterans say.
The hope, said Michael P. Manning, managing partner of Boston-based investment consultant and OCIO firm NEPC, "is that they're going to put us in front of organizations where there's a good cultural or philosophical fit, as opposed to organizations ... who just send out 20 RFPs," without a deep understanding of how a firm such as NEPC works and its relative strengths.
For now, that market segment remains nascent, with a lingering “mom and pop” feel about the small circle of competitors that have won a modicum of name recognition.
The third-party evaluation business of benefits advisory firm Curcio Webb, which market participants point to as one of the largest players in the space, has a team of seven, said Uma Kolluri, a principal with the Lawrenceville, N.J.-based firm.
Other firms focused on OCIO and consultant search assignments include Marina Del Rey, Calif.-based North Pier Search Consulting; Michigan-based Institutional Investment Consulting, with a team of six principals and support staff; and Chatham, N.J.-based Kidderbrook Group, which lists two principals on its website.
With low barriers to entry, a number of competitors with just one or two key professionals apiece have entered the fray in recent years, analysts say. Prospective clients who might have been aware of five third-party evaluators in the past now say they may know of maybe 20 or more, Kolluri noted.
Big footprint
Compact size, meanwhile, doesn’t necessarily mean an insignificant footprint.
By way of example, Alpha Capital Management, with only two principals and one analyst, reports having conducted over 100 OCIO and consultant searches over the past eight years, including 23 for clients with $1 billion or more and another 12 with between $500 million and $1 billion, according to Brad Alford, a principal and founder of the Atlanta-based firm.
Traditional investment consultants, eyeing third-party evaluators' growing role in overseeing OCIO searches, have responded by bolstering their efforts to forge and maintain relationships with the one or two handfuls of players quarterbacking the bulk of those RFPs now.
With a lot of corporates and even some public funds “starting to use third-party search firms to do consultant searches … we’re making an effort to have a good relationship with those people,” said Greg Allen, CEO of San Francisco-based Callan.
That effort evolved over time as Callan found those firms sporting an ever-higher profile in industry searches. Three years ago, there was maybe one firm Callan made a little effort to cultivate ties with. "It wasn't really a strategic matter for us," said Allen, more a matter of "hey, these people keep calling." But Callan's team quickly concluded that the firm should be making more of an effort to work with those growing search boutiques.
Steve Charlton, a partner and head of client solutions with NEPC, said with third-party evaluators now accounting for roughly a third of the OCIO searches NEPC responds to, the investment consultant — with $1.66 trillion in advisory assets as of June 30 and over $100 billion in OCIO mandates — is making “a concentrated effort” to engage with those firms, reflecting their rising profile as “the interface between the firm and the end client."
To some extent, executives say, it can be challenging for traditional consultants to adjust to that evolving environment.
In an interesting way, as third-party evaluators continue to carve out solid businesses, "consultants now have to kind of put on their consultant relations hats,” said Callan’s Allen.
Historically, “we would be the trusted adviser in the room, with no other voice” weighing in, noted Rich Nuzum, executive director, investments and global chief investment strategist with Mercer Investments. Going forward, “you have to be humble and recognize that you’re actually going to get kicked out of the room when the client wants (an) opinion on you,” he said.
Mercer may be better placed than most to make that adjustment because its work in 85 countries has provided it with “85 different learning laboratories,” Nuzum said. “We’ve had experience being intermediated,” a development seen in the Australian market as early as 20 years ago, he said.
Positive role in the industry
Despite the challenges, Allen, Charlton and Nuzum agree that third-party evaluators are playing a positive role in the market.
Yes, “you’ve got to share that trusted adviser status that we all value so highly and aspire to with other parties” but ultimately that’s good for the industry, said Nuzum. The diversity of views and even some constructive conflict “adds value to investment decision-making,” helping plan sponsors get the most out of the consultants and OCIOs they work with, he said.
“They do a really good job, (creating) a level of consistency and transparency that helps both us and the asset owners,” agreed Allen.
Third-party evaluators ask a lot of challenging questions, Charlton noted, which in turn can result in a more robust process than searches that don’t involve those players. They are effectively helping clients do a better job fulfilling their fiduciary duty, he said.
Kolluri said the goal of all the questions Curcio Webb asks — of both the clients looking to hire an OCIO and the OCIOs themselves — is to make sure the right providers are brought to the table for the right clients. “It’s all about the fit,” she said.
The challenge now, with the number of OCIO providers growing quickly, is “how do you start differentiating them,” asked Kolluri. “This is what we do, day in and day out,” giving Curcio Webb's team a good understanding of many of them, she said.
P&I's latest annual survey of the investment consulting industry found 36 respondents with OCIO services managing a combined $1.7 trillion in assets, up roughly 20% from the year before.
The third-party evaluator sector, meanwhile, remains highly concentrated, with some market players estimating that the top five players in the space account for 90% or so of the OCIO searches those firms manage.
Jim Scheinberg, managing partner of North Pier Search Consulting, figures there’s lots of room left to grow.
Third-party evaluators oversee roughly 400 searches annually now, triple the level of just five years ago, Scheinberg said.
That remains a tiny fraction of a universe of 200,000 institutional pools of capital in the U.S. with $50 million in assets or more, Scheinberg noted. With more and more plans accepting that it's prudent to test their prevailing governance structure by running an evaluation or a search at least once every 10 years, he figures North Pier could double in size over the coming five years.
Even with expectations of a growing number of searches, however, the competitive environment should remain conducive for the small, independent boutiques that currently dominate the sector, Scheinberg predicted, noting that it’s just not profitable enough for bigger consulting firms “to take it seriously right now.”
If bigger consulting firms did begin offering third-party evaluation services, meanwhile, that could make it more difficult for OCIO providers, themselves often tied to big consulting firms, to open their books to a competitor, noted Julie K. Stapel, a Chicago-based partner, focused on ERISA-related issues, with law firm Morgan Lewis & Bockius.
For now, the top third-party evaluators report growing demand for their services.
Eight or nine years ago, Curcio Webb’s OCIO search business was garnering maybe 10 to 12 assignments a year but today that number is closer to 30, said Kolluri.
“The other thing we do, and it’s been picking up a lot of steam recently … is OCIO monitoring," she said.
Asset owners can share fiduciary responsibility with an OCIO but they never really offload that responsibility entirely, Kolluri said. And that reality can lead to something more like retainer work, where the client is saying “all right, once a year please come in and review” how the OCIO is performing, she said.
Stapel uses a car analogy with plan sponsors: “You’ve given (the OCIO) the keys but there’s still some role for you here to make sure they’re …not going to run the plan off the road.” And often, the client will retain the same firm that conducted the search to do the subsequent monitoring, she said - a nod to the fact that, at the moment, “there just aren’t … all that many players in the space yet.”
However Alpha Capital’s Alford said that dual role could prove problematic, citing the challenges of remaining objective about the performance of a firm your team recommended to the client in the first place.
In another possible sign that the third-party evaluator sector is maturing, potential clients are increasingly "running RFPs to select third-party evaluators," with between 30% and 50% of the search mandates Curcio Webb wins now coming out of a process competing against firms "like us," said Kolluri.
"Hiring a consultant to hire a consultant can get a little dizzying," said North Pier's Scheinberg. Such competitive processes probably account for roughly "two out of every three cases that we do now," he said. Five years ago, "that number was not even 25%," he said.
