In this special ‘Off The Record’ we let asset managers off the leash to reveal their true feelings about the role of consultants in the investment chain.
And it appears that away from the interview room and consultant interrogation, investment managers are not shy of an ‘opinion’ or two about their consultant brethren.
Let’s stick to the positive though, to begin with….
Asked what they feel to be the advantages for pension schemes in using consultants, two-thirds of managers noted the value of external expertise in asset liability modelling leading to definition of a scheme’s strategic asset allocation.
Praise was also offered by the majority in terms of the time saving and transparency elements consultants bring to the task of manager selections by pension funds.
Trustee comfort, as well as issues such as corporate governance, ethical investment and performance measurement were also put forward as plus points in the consultants’ defence. One manager suggests consultants provide a timely notification to asset managers about the nature of pension fund manager selections: " Consultants remind asset managers that the market does not only care about investment returns."
However, on the negative side punches aren’t pulled.
One manager believes European consultants have got it all wrong on the question of asset allocation: “Most seem to come from the liability side and this is in contrast to the US where the approach seems to come from the asset side. It would be refreshing to think that the UK and Europe would adopt such an approach in the future.”
Others claim asset managers are being pigeonholed by the criteria used for allocation decisions. One comment reads: “ You risk demotivating asset managers by creating arbitrary limitations to their investment universes and empowering them fully to make their choice.”
Another adds that consultants are over reliant on ALM and historic data, and a further comment notes that ALM outcomes can be overly detailed with consultants stretching their remit: “Consultants should limit themselves to the equity/bonds split rather than be prescriptive about the equity split between geographic markets. That should be left to the fund managers.”
For manager selections a number of respondents point to a lack of consultant resources, which they say stifles the creation of varied and innovative shortlists.
One manager clearly sees the New Year as a time for putting the record straight.
While lauding those firms which recognise that ‘noblesse oblige’ in raising the level of debate and analysis, comment is a little less obliging on the remainder, which are described in varying degrees as ‘parasites’ consisting of “old lags who have been hanging around the industry for years and can scarcely believe their luck”.
The vitriol continues: “These consultants are to blame for the concentration of the industry among a few firms and into balanced mandates, yet they try to shift the blame entirely onto the managers.”
A point forcefully made… but nonetheless reiterated by other managers of a verbally more gentle persuasion.
This is an anonymous survey, however, and names will not be forthcoming!!
Despite such spleen being vented against them, consultants should take heart that around 60% of responding investment managers believe the services provided offer value for money, with several managers noting the particular importance of consultants for smaller pension schemes with fewer resources addressing ever more complex issues.
A similar number opine that the advice provided by consultancy firms is on the whole fair and impartial, although a couple of managers make the same claim: “ Consultants still tend to stick with their favourite managers for selection processes. They are not uncovering the new winners.”
Sour grapes or valid point?
Impartial or not though, most asset managers do feel there should be change in the way consultants are remunerated for their endeavours.
A third of managers feel consultancy payment should be settled on a fee basis, with one reply proposing this could either be on a time/cost, fixed or performance related lines.
A small number say payment should definitely be performance led and a further 33% think a mix of fees and commission would be the appropriate remuneration method.
Nevertheless, when asked whether consultants should be more accountable for their advice the reaction of managers was an emphatic yes – to the tune of over four fifths of replies. Clearly some managers see the issue as an opportunity for revenge.
“It would be nice to know that consultants went through the same sort of rigorous questioning that fund managers have to go through on performance issues. I suggest that every three to five years, whatever the review period is, that the trustees put the consultant in the hot seat with the investment managers present,” writes one.
A more practical solution is offered by another manager: “A good idea would be to set up some kind of public record with input from clients and independent auditors to ensure consultant accountability.”
The overall feeling is that this is an issue that must be addressed.
Surprisingly though, the question of whether the introduction of multi-manager funds is a good development for the pensions market provokes a three way split in opinions.
Just over a third of managers believe it to be healthy for pension plans, with one pointing out the inevitability of such funds in today’s market-driven environment.
“Trustees hire managers at the top and sell at the bottom. This is the opposite of good investment practice but is understandable given the pressures they face. Multi-manager funds can be much better diversified and take a longer term view.”
Another argues that multi-manager funds at least allow the consultant’s performance to be measured.
The middle ground is summed up by one comment describing the multi-manager issue as: “neither positive or negative for pension funds, but certainly one which broaches the conflict of interest debate.”
Those against are unequivocally scathing: “Investment consultants should only do investment consultancy – don’t give me that ‘….’ about Chinese walls!”
More positive were the suggestions for how the future role of the consultant managers will (should?) shape up. Most managers recognise that the increasing complexity of the industry will call for greater advisory input for pension funds on asset/liability correlations, manager monitoring, trustee education and further forays into areas such as alternative investment research. One manager proposes that eventually consultants will become the co-ordinators of this whole process, bar investment management.
That is not to say asset managers don’t want a piece of the action too. A third of managers feel investment houses will seek more consultancy type work in the future, despite one manager lamenting already slim business margins: “I would not want to, fees are tight enough as it is.”
To end on a positive note, however, one respondent magnanimously states that consultants will be catalysts for industry change: “They will be very important internationally, be it in developing diversification, pushing forward DC or helping companies and governments recognise the issues.”
Did I hear someone say new millennium spirit of harmony between consultants and asset managers? Hugh Wheelan

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