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Consultants Gambled Their Reputation — And It Paid Off

Envy, Aon, and outsourced-CIO empires.

Competitors looked askance at advisory firms like Aon and Mercer when they began offering to not just advise clients, but invest for them.

“A lot of consultants were worried about having any service that didn’t say ‘consulting’ beside it,” Cary Grace, Aon’s CEO for global retirement and investment, said in an interview Tuesday. 

But pure advice wasn’t cutting it for some Aon clients, who said they lacked the staff needed to implement their consultant’s guidance. “We started going after solutions” — selling outsourced-CIO (OCIO) services — “in a very public way about nine years ago, and there is probably only one other consultant that moved as early.” 

As other consultants jumped onto the OCIO bandwagon, some holdouts still saw inherent conflict in independent advisors selling asset management services. But institutions like pension funds, foundations, and endowments didn’t seem to share this objection. They shoveled assets into OCIOs’ care, and consulting firms became the biggest players in a booming category.  

According to Grace, “as that shift started to happen, it became very challenging for a number of consultants that had said, ‘We’re never going to do that.’” Without OCIO and its deeper margins, she wondered, “How are you going to have growth as a consultant? How are you going to provide career opportunity? The industry isn’t going back to 20 years ago. It’s just not.”

Institutions globally had ceded control of about $1.69 trillion to outsourced CIOs as of 2017, Aon figures showed. Including partially delegated assets, research firm Cerulli Associates estimated $2 trillion in industry assets by 2020. 

But the fastest-growing category for outsourcers could make that number far larger. 

The amount of U.S. defined contribution assets under Aon’s OCIO direction doubled in a little over a year, from $11.2 billion at the end of 2016 to $22.6 billion at the end of last March. D.C. plans — 401(k), 403(b), and the like — represent a small slice of OCIO business, but experts see it as a massive potential market primed for outsourcing. According to the Investment Company Institute, American 401(k) plans held about $5.7 trillion this March.

[II Deep Dive: The Dominant Players in 401(k) Land]

“The shifts right now from defined benefit to defined contribution are huge,” Grace explained. But for a company, “running a D.C. plan is expensive and risky.”

Traditional consultants and service providers that already work with D.C. plans sponsors have a meaningful edge if, or when, those sponsors decide to make their 401(k)s someone else’s problem. 

“It’s very common for large institutional managers to try and get into D.C., but plan sponsors are very particular about who they partner with,” said Josh Cohen, a former consultant who now leads PGIM’s DC efforts. To win business, “you really have to show commitment” to defined contribution. “You have to talk the language, and not just tell the investment story, but also speak to the participants’ side, to HR, to the ERISA lawyers,” he said. “Having good investments is table stakes.”

PGIM isn’t fighting to become an OCIO for defined contribution plans, but rather to serve those providers as a fund manager. Even though the absolute volume of outsourced assets is small, Cohen sees OCIO as a priority for PGIM. If it takes off as many predict, PGIM wants to be positioned to serve the new D.C. allocators. 

“We see OCIO as a channel to invest in, more and more,” Cohen told II in an interview. “It’s an opportunity to bring institutional quality to defined contribution.” OCIOs are “already taking the fiduciary risk, and they have the expertise.”

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