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
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.
Theres a lot of change going on in the
consulting industry, and theyre certainly facing a great
deal of fee pressure, said Chris Mason, senior analyst at Cerulli.
That being said, consultants arent going
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
Still, Mason said that institutions continue to rely
heavily on their consultants for manager due diligence,
especially for more complex asset classes like
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
dont 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
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 hes 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.
Theyre building out teams, theyre spending
money on talent, and theyre not going to need the
consultant because they have their own team and their own
Dunn added that investors increasingly want and need
investment advice thats customized to their
portfolio goals, something that the traditional investment
consulting model hasnt provided.
A one-size fits all consulting firm that provides the
same advice to all their clients isnt the right
solution, he said.