Are investment consultants worth the money?

Robin Powell picks up an article that makes some interesting observations.

Investment consultants sit at the top of the food chain. They are responsible for the allocation of pension fund money and are a pre-requisite for running a pension trustee board.

“Why do we continue to hire poor performing investment consultants?”

When the CFA last investigated their privileged status, it ducked the question that Brian Schroeder’s article poses and chose to focus on the conflicts of fiduciary management – that’s the one where investment consultants take over the management of the funds and assets they were previously advising on.

But Schroeder’s is the right question. Interestingly , it is the consultants who are keen to answer it. Here’s John Belgrove, long a friend to this blog

There are many sound as well as flakey & fun observations here which are worth individually unpacking, both for their relevance & their misguidedness.

Having thought a lot about these points over decades I personally (sadly) conclude performance fees cannot work well alongside “independent” advice.

An advisory consultant cannot (& shouldn’t) dictate what their client chooses to do. The client rarely (never?) does everything it’s consultant recommended & a good consultant typically adapts their advice to the clients preferences.

The service still absolutely merits objective/3rd party measurement but inextricably advisory work includes many subjective aspects of delivery and conflicts abound.

Perhaps (ironically) the closest to a “pure” form of consultant performance delivery is through an OCIO (or fiduciary management) arrangement where the consultant has complete discretion to be fairly judged by their asset selection decisions.

But they should not be the scorekeeper in those circumstances obviously. Do you offer performance based fees for your OCIO selection services Brian? Do you wish to be paid by your journalistic recommendations Robin? (Be ready for 3rd party judgment).

Robin Powell

John’s key message is that performance can be measured because it takes into account the cost of opportunities missed, while advice only measures the opportunities taken. It is worth having a go at those who throw arrows like Brian Schroeder and Robin Powell , but while they should be accountable for their darts, what of the many commentators who sit on their hands?

Investment consultants also get paid for sitting on their hands and Schroeder seems keen to see them move to being “Outsourced CIOs” or Fiduciary Managers. These are at least accountable when things go wrong , though the risk is that they only get sacked in a falling market and then only when a consultant is taking aggressive positions

The conservative consultant doesn’t get criticized for sitting on his/her hands even when under-performing in a bull market , because clients are still grateful for the absolute positive returns. This drives investment consultants and OCIOs towards caution. Nobody gets sacked for being too cautious. 

Paying consultants by their Value for Money

Shroeder says that if your OCIO is good he/she should want a performance fee and has written an article on how such fees good be levied (well worth reading).

But Chris Sier points out that until asset managers move to a model where they are paid for their achieved value, it’s unlikely that fiduciary managers, let alone plain old consultants will be paid this way.

The standard consultant is of course not in control of investment decisions (which are still taken by consultants) and the counter-argument is that consultants shouldn’t be marked down for governance failures.

I’m not sure that I buy either reason for not paying a consultant on results, after all trustees have the right to hire and fire ( a crude performance fee) and consultants take on mandates with an understanding of who they work for and how their trustees work.  It could be argued that a major value add from an investment consultant is in ensuring that timely decisions are taken.

But I think it very unlikely that any consultant would want to be paid for marshalling the people paying them. And if you were having to pay a consultant extra to take timely decisions on their advice – isn’t that doubling up the risk of that advice being wrong?

Investment consultants should expect not to get paid performance fees, if trustees reject their advice. But if my client consistently went against my advice – I’d walk rather than be pushed!

Sacking the “little piggie” advisers

I agree with Philip Case’s comment  in the thread started by Robin Powell

Consultants with conviction usually stand out in the crowd but some of them may be allowed to adopt a little pig mentality recommending low conviction tactically or through fund selection, thus adding little or no value and sometimes detracting value. These Consultants need to be shown the exit. There has to be no room for passengers; more red cards and less sympathy cards are the order of the day.

I have said before that in any ambitious investment consultant there is a hedge fund manager trying to get out and in his next comment, Phil insists  that big piggies should strive to be absolute return managers

I have never met a disgruntled client with an absolute gain higher than cash net of fees. Clearly WM’s need to have a greater focus on an absolute gains; clients can’t eat positive relative performance when markets are falling

But big piggies charge enormous performance fees for pulling this trick off, but Phil goes on to point out that little piggie strategies can work to and

Whatever approach is preferred the added cost of delivering performance has to be accounted for and justified.

Which is good consultancy but leaves me wondering where the conviction went!

Has pure investment consultancy had its day?

It’s more than 10 years ago since Robert Gardner and Kieran Rosenberg went at each other over the merits of implemented consultancy v fiduciary management. My blog in 2009 is still one of my it was prescient.

Implemented consultancy is now integral to  LDI and fiduciary management continues to take over large swathes of the DB investment landscape. The fiduciary manager (aka OCIO) is paid by funds under management and can claim some alignment if managing for an absolute return, but the fiduciary manager and the hedge fund manager are still some way apart.

But convergence seems to be happening, as can be witnessed by the thread of comments that I have been looking at. Of course all these arguments have been made in the context of DB pensions. But they become much more urgent, when we consider DC default funds.

Are investment consultants worth the money?

I suspect that investment consultants are going to have to work much harder in future to retain their position at the top of the food chain. They could morph from implemented consulting into fiduciary management and from there into hedge fund management. That looks like success for the consultant though the risks of rewarding an organization for delivering the entire investment food chain are high (see previous blogs on Calpers).

For consultants who want to retain mandates, they will find many of the schemes they are advising , pulling the rug and aggregating to master trusts, or selling out to insurers and superfunds.

Those who remain will be fishing in bigger pools and will struggle unless they can demonstrate VFM. I suspect that the quality of buying among larger DB schemes is making the kind of bad practice remarked on in Brian Schroeder’s blog less prevalent.

But investment consultancy is still a relatively unaccountable are of advice and for the observations made by Brian and those on the thread, we can be thankful. It deserves to be questioned and not just by the CMA.

Brian Schroeder – from the mountains of Utah

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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1 Response to Are investment consultants worth the money?

  1. Robert Davies says:

    Interesting article.

    But I would make it even simpler.

    These days you can buy market beta for a few bips.

    A key question is can you add positive alpha? Because that is all that consultants can contribute.

    However, even more important is the time frame. When features like QE distort capital markets over decades measuring relative performance over periods less than that is just trying to measure noise.

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