More transparency and thicker Chinese walls between different businesses under the same umbrella. These are two leading themes in the US consulting industry after the inquiries opened by the Securities and Exchange Commission(SEC) and the New York Attorney General Eliot Spitzer. Both inquiries are focused on the potential conflicts of interest within consulting firms and have not reached any official conclusion.
“Our efforts go on. There is not a timetable for this examination and we cannot discuss its ongoing,” says John Heine at the SEC, the authority that in December 2003 started a “fact-finding mission” with a letter to many US investment advisory firms, including Mercer, Frank Russell, Wattson Wyatt, and Wilshire Associates, seeking information about alleged ‘pay-to-play’ schemes. The latter involve a money management firm paying a consultant through indirect means in return for access to pension fund clients. Later last year, Spitzer also paid attention to the same problem, while investigating the insurance group Marsh&McLennan that controls Mercer.
All the consulting firms have denied any wrongdoing, but some of them have started a revision of their organisation, in order to adjust to the new climate. The first one to change was Wilshire Associates a year ago. “In order to strengthen our long established ethical walls and eliminate the possible appearance of conflicts of interest, our board decided it was necessary to separate the funds management and consulting business units and appoint two senior managing directors to head the units with both reporting directly to the chief executive officer”, explains a spokesperson, Kim Shepherd.
She continues: “Wilshire Associates prohibits pay-to-play arrangements. At no time we received finder’s fees or placement fees from investment managers. Wilshire Analytics, another business unit of Wilshire Associates which is known for its investment technology solutions and services, receives fees for providing these solutions and services to scores of institutions including banks, insurance companies and investment managers.
“Wilshire consultants make recommendations as to investment managers solely on the basis of merit and without regard to which investment managers subscribe to Wilshire Analytics’ products. The employees of Wilshire Consulting and Wilshire Funds Management, the business unit in which manager research is located, do not have access to information about the identity or size of Wilshire Analytics business relationships.”
Other moves by Wilshire include the decision to sell its brokerage to The Bank of New York (operation completed in the fourth quarter 2004). This was in order to concentrate on the firm’s core businesses, says Sheperd, and the decision to stop hosting “investment roundtables” with the attendance of representatives from pension funds and investment management firms. The latter “paid their own travel and hotel costs, and Wilshire Associates received no fees or compensation of any kind from attendees,” points out Sheperd. “We have not hosted any investment roundtables for almost two years and do not plan to do so at this time.”
Watson Wyatt and Mercer have also discontinued their conferences, which is one of the most criticised practices in the industry. According to some observers, money managers attending these conferences pay up to $55,000 a year for five or six events while pension funds’ officials attend free, often in luxurious resorts. These are seen as a way for investment companies to “buy” a good recommendation to these pension funds and as money-making schemes for the consulting firms.
In order to avoid any perception of conflicts of interest, Watson Wyatt decided to end its global asset studies conference series for money managers in Europe: the last one will happen next June. Mercer’s last Global Investment Forum (GIF) conference was held in Tokyo in December 2004: the firm explained the decision to terminate the forum with “changes in the regulatory environment and client expectations”, even though it claimed that the GIF was “a valuable service and has always operated according to the highest professional and ethical standards”.
A more radical change implemented by Marsh&McLennan is the recent split of its Mercer Inc consulting unit in two: one is Mercer Human Resource Consulting, covering the core HR consulting practices as well as new outsourcing and investment solutions businesses. The second is a group of MMC’s specialty consulting businesses, which include Mercer Strategy and Operations, Mercer Oliver Wyman (risk and financial services), Mercer Delta Organizational Consulting (leadership and organisation change), Lippincott Mercer (design and brand strategy) and NERA Economic Consulting.
The heads of the two new units report to the president and chief executive officer of MMC, Michael Cherkasky, who explains: “As MMC continues to realign its structure, these changes at Mercer represent important steps in streamlining accountability while ensuring that our leaders remain close to the clients and markets they serve”.
Callan is one firm that has not altered its policy regarding its the conferences and the internal business structure. “Our business model has not changed,” says the spokesperson Deanne Christopulos. “We have three separate business units with no overlap in personnel, revenue streams or compensation arrangements: Fund Sponsor Consulting Group, Institutional Consulting Group, and Independent Advisor Group. Every quarter we provide our fund sponsor clients with a list of all investment manager relationships. When conducting an investment manager search, we prominently disclose in the search documents presented to the fund sponsor whether or not a manager presented is a Callan client (historically about half have been clients). This information may be used as part of the client’s decision process, but it has no impact on Callan’s review and decision process, which has not changed.”
Conferences will go on being organised by the Callan Investments Institute: “It promotes fiduciary education for both fund sponsors and investment managers,”explains Christopulos. “The institute provides a forum for the dissemination of original Callan research as well as collegial exchange in an environment where sales pitches have no role and are in fact prohibited. It is our belief that the more sponsors and managers understand each others’ needs, the better investors will be served.”
Another consultant sticking to its strategy is Russell. “We have structured our business from the beginning to reduce the possibility of conflicts of interest,” says Russell Investment Group’s Monica Butler, managing director for US Consulting. “Russell does not accept compensation from money managers for the manager to be included in a manager search for a client. We also have written policies for managing conflicts as part of Russell’s code of ethics, which each associate must read and sign each year. We know written policy and procedures give clients only conditional comfort. We have to look beyond the paper documents and assess the people who comprise the company. At Russell, corporate integrity is highly valued and embraced at all levels of the company from senior management to support staff.”
What the Russell focuses on is its clients’ needs, she emphasies. “There is an increasing willingness among clients to reach for new sources of return, such as alternatives and porting alpha, and their desire with DB funds to limit exposure to interest rate risk. These two objectives at the extreme are positioned on the opposite ends of the risk spectrum. With leverage, which is being talked about by some funds, sponsors can achieve both objectives.”
Butler adds: “Accordingly, pension consultants need to be extremely flexible, smart and well resourced. Since 2004 we have been continuing to build our research and strategy team, focusing on product research, particularly on collateralised commodity futures and hedge fund of funds”.
Ultimately, “transparency and documentation of issues and process will be more and more important in the pension fund consulting business”, says Sean McShea, chairman of Ryanlabs.

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