Investment consultants are overcoming industry threats to remain a potent force in asset management.
More than 60 percent of institutional money flowing to U.S. asset managers last year was intermediated by consultants, and their influence is expected to rise “slightly” in 2017, according to a Cerulli Associates report. The industry gatekeepers remain important advisors to local and state government defined benefit plans, with about 90 percent of public pensions larger than $5 billion working with at least one consultant.
Consultants are keeping their grip on the asset management industry despite investor disappointment with some of the sophisticated strategies they might have recommended in the hedge fund industry in recent years. The outperformance of low-cost index-funds has added to pressure to reduce fees, while consultants also face rising competition from the outsourced-chief investment officer sector.
“There’s a lot of change going on in the consulting industry, and they’re certainly facing a great deal of fee pressure,” said Chris Mason, senior analyst at Cerulli. “That being said, consultants aren’t going anywhere.”
The industry has come under fire in recent years, including scathing critique from billionaire investor and Berkshire Hathaway Chairman Warren Buffet, who in his 2017 letter to shareholders questioned investment consultants’ value. Other investors may share his concern, with more than half of consultants surveyed by Cerulli reporting fee pressure from clients as one of the threats facing their business. Other challenges include finding ways to differentiate themselves in what has become an increasingly competitive environment, particularly as outsourced-CIO firms expand their share of the market.
Still, Mason said that “institutions continue to rely heavily on their consultants for manager due diligence, especially for more complex asset classes like alternatives.”
Michael Oyster, chief investment strategist at Cincinnati-based consulting firm FEG, says his firm adds value by finding small, “superior” managers that clients might not discover otherwise.
“Everybody has heard of Bridgewater, Citadel ... you don’t need a consultant to know who those organizations are,” he said. “We literally scour the entire earth looking for unique managers with limited capacity and a demonstrated ability to add value.”
Many institutional investors – especially funds lacking a robust internal investment staff – will need the help of a consultant or outsourced-CIO to meet return targets, according to Oyster, who noted that FEG offers both services.
“Investing in the future is going to be a lot harder than it has been in the past,” he said. “Complexity of portfolios is increasing, and it has to in order meet expected rates of return.”
Jim Dunn, CIO at Verger Capital, also sees complexity making some asset allocators more reliant on outside help, pointing to funds run by an investment committee meeting four times a year as an example. Still, Dunn says he’s surprised the proportion of asset flows controlled by consultants was so high, given the rise of outsourced-CIO managers and growing sophistication of some investors.
“Take endowments for example,” he said. “They’re building out teams, they’re spending money on talent, and they’re not going to need the consultant because they have their own team and their own talent.”
Dunn added that investors increasingly want – and need – investment advice that’s customized to their portfolio goals, something that the traditional investment consulting model hasn’t provided.
“A one-size fits all consulting firm that provides the same advice to all their clients isn’t the right solution,” he said.