Fees, talent, complexity pose challenges

Facing a variety of pressures from fee compression and talent wars to growing demand for more complex services, investment consulting firms have to evolve their thinking from the way business has "always been done" to stay afloat, officials say.

One of the biggest challenges facing the investment consulting industry is the ongoing "war of talent" with the asset management industry, warned Bryan Ward, senior partner and head of solutions and sales at Aon Investments USA.

"We are doing a good job in recruiting and attracting entry-level workers and keeping them," he said. "But once they reach their midcareer point — say after 10 to 20 years — they sometimes go to asset management firms," primarily chasing higher compensation.

But compensation isn't the only factor at play here, Ward said, suggesting job satisfaction and the feeling of accomplishment from providing comprehensive services are also crucial elements in keeping workers.

As the consulting industry and investing in general become more complex, retaining valuable staff will be very important for the industry's future, Ward added.

But given the current tight job market, it is getting harder for some consulting firms to recruit new talent.

"We have tried to remedy this by in-house training and education," said Seth Almaliah, senior vice president at Segal Marco Advisors. "We would like to have a workforce that is multiskilled given how the markets have become so complex and will continue to change and evolve."

Stephen P. McCourt, managing principal and co-CEO at Meketa Investment Group, acknowledged another big pressure on the industry: the demand for ever-increasing services combined with ever-increasing fee competitiveness.

"Given this, consulting firms must find ways to deliver more for less over time, through reinvestment in their businesses," he said.

But John Delaney, senior director and portfolio manager in investments at Willis Towers Watson, believes a lot of the challenges the consulting industry faces are largely what makes the space interesting to be a part of.

"There is the ongoing challenge of continuing to ensure offerings are well-suited to the needs of the client base, and providing efficient delivery mechanisms for delivering those offerings are items we challenge ourselves on daily," he said. "We believe the challenge to innovate and evolve as the market evolves is one of our strengths as a business."

While the investment consulting industry is facing competitive pressures, Albert Lim, senior consultant at Russell Investments, does not anticipate a vast wave of consolidation anytime soon.

"I think there will always be room for the smaller niche players who can provide specific services," he said. "These small shops can survive, and even thrive, particularly if they provide sophisticated, customized advice to clients and help then navigate an increasingly complex market and regulatory landscape."

For instance, Lim said, some shops may specialize in providing advice to large corporate pension plans, while others may specialize in public pensions or Taft-Hartley plans. Also, "some smaller shops may be able to provide OCIO or consultant search capabilities, which has become more common these days," he added.

Aon's Ward agreed, in part. "Consultants come in all shapes and sizes and they serve asset owners that are just as varied and have a wide set of needs" he said. "But it has become a crowded marketplace, so we might possibly see some smaller firms merging."

Leah Emkin, chief client officer at Wilshire Advisors, noted shifting dynamics within the firms themselves, including an aging staff, which could make some consolidations inevitable, she said.

Greg DeForrest, executive vice president and head of fund sponsor consulting at Callan, acknowledged the "increased demands placed on consulting firms, especially as we continue to expand to provide both discretionary and non-discretionary businesses" and "for consulting firms to develop expertise in all areas of the business, whether it's public markets, private markets, DC plans, DB plans, etc. — that will require a certain level of scale to be able to provide all of those services effectively."

Wilshire's Emkin believes consultants will need to evolve their thinking beyond how business has "always been done" to be successful.

"We believe that consultants who can offer their clients sophisticated tools for risk measurement and management, and that can deliver superior client service and create efficiencies through technology, will have an edge," Emkin said, citing Wilshire's recent decision to acquire the $20.8 billion Lyxor Asset Management Inc. as an example.

Lyxor Asset Management Inc., also known as Lyxor U.S., provides risk-managed, alternative and hedge fund investment solutions to institutional investors in North America and will boost Wilshire's alternative investment offerings.

Consultants are playing an increasingly larger role in providing investment solutions to various asset owners, WTW's Delaney observed. "Corporate clients, endowment and foundation, and wealth channels are increasingly looking for solutions to their investment challenges, whether that is OCIO mandates, research-oriented propositions, or advice," he said. "We see potential for consultants to continue to play the role of innovation within the investment management community, and evolving offerings to be consistent with ever-changing needs in the marketplace."

Delaney said he expects this investment solutions aspect of consulting to continue to be prioritized by consultants and the clients they serve going forward.

"Asset owners continue to see value in outsourcing implementation aspects of their asset pools, and we expect that to continue for the entirety of asset pools, but also specific asset class implementations," he said. "Additionally, we expect to see consultants work with different types of clients — RIAs and other wealth channels — to continue to innovate and provide investment solutions to a larger portion of the asset owner universe."

Meketa's McCourt agreed that the demand for additional consulting services seems both strong and broad based.

"The dynamics in the capital markets since COVID-19 have led to a significant increase in interest for general education on all types of private markets strategies, risk-mitigation strategies, and asset allocation solutions," including OCIO, LDI approaches and enhanced monitoring services, he said. "Clients are eager for time-tested approaches that provide the best chance for achieving their objectives over the long term."