Inside investment: Consulting confusion
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Inside investment: Consulting confusion

Investment consultants are taking a leaf from Madonna’s playbook and reinventing themselves. Implemented consultancy is causing a commotion but it is far from clear who the winners will be.

The transformation of Madonna Ciccone from virgin to material girl, dominatrix, soft-porn peddler, record label owner, producer, working mother and globe-trotting baby rescuer is head turning. The most successful female recording artist ever, Madonna is called a dynamic entrepreneur and "America’s smartest business woman". In contrast to Madonna’s meticulous planning and execution, change is often thrust upon businesses that get caught on the back foot without a plan B. Examples in investment management are legion: the rise of indexation; the shift from balanced to specialist management; the slow response to the challenge of absolute-return investing; and the failure of the big mutual funds to appreciate the disruptive power of ETFs.

Institutional investment consultants are the latest part of the industry to find their influence waning. They have found it increasingly difficult to get paid adequately for what was once their flagship product: picking fund managers. That is why more have moved into the business of managing the managers, in effect becoming investment managers themselves.

First to break ranks in the late 1990s was Frank Russell Company. Its peers looked on enviously as the reinvented Frank Russell Investments enjoyed considerable initial success.

The service has evolved further. While Russell was always held in high regard as an adviser, firms such as Mercer and Towers Watson & Co have typically played a far broader role. As well as serving as investment consultant, they are often the funds’ actuary, performance measurer and independent trustee. The latest vogue is to package these services together with asset allocation advice and fund management under the portentous title of implemented consultancy.

This is a growth business. Estimates put assets under management for implemented consultancy (also known as fiduciary management) at about $270 billion worldwide, double the sum of five years ago. The business started in the Netherlands, largely in response to regulation. Dutch firm Mn Services is still the biggest, but Towers Watson, SEI Investments, BlackRock and Mercer are fast catching up and pension funds in the UK and US are jumping on the bandwagon.

Unlike SEI and other fund managers, investment consultants are already intimately intertwined with pension funds. The move into higher-fee-earning, bigger-margin activities is understandable but presents obvious conflicts. The first is the old question of who guards the guards.

In implemented consultancy the consultant hires and fires fund managers as it pleases, but who assesses if they are doing a good job? It is also a lot easier to sack a single, poorly performing manager than a firm providing an array of essential services.

Secondly, more often than not these services are bundled into one and the pension fund is charged a single fee. That runs counter to the thrust of current regulation. Consultants use their buying power to negotiate fees with the underlying fund managers. There may be no harm in that. But who gets the benefit? Is it passed on to the client? Unbundling and transparency over precisely what is being paid for is the order of the day throughout financial services. Implemented consultancy feels decidedly retro.

In contrast to Madonna’s meticulous planning and execution, change is often thrust upon businesses

There is also a more subtle regulatory issue. Investment consultants have not been subject to the full gaze of the regulators. They have managed to dodge this because they have provided advice on investment rather than investment advice. Implemented consultancy crosses this line. But perhaps the biggest problem for the investment consultants is a perennial one. They have been too slow to move and their revenue base has been eroded. That has curtailed their ability to attract and retain talent. Five years ago when liability-driven investment was the big new thing and swaps were regarded as the solution, the investment banks got out their chequebooks and raided the investment consultants. Faced with the rise of implemented consultancy, asset managers are now doing the same.

The European head of investment consulting at Towers Watson has joined Goldman Sachs Asset Management. Tim Gardener, the former president and global head of investment consulting at Mercer (and one of a small handful of consultants respected outside his own industry) joined Axa Investment Managers last year.


Perhaps the most profound but least read book written on pension funds, Fortune and folly: The wealth and power of institutional investing, is by two anthropologists, William O’Barr and John Conley. The authors controversially concluded that one of the defining characteristics of behaviour was diffusion of responsibility. In layman’s terms, that means passing the buck when something goes wrong.

The genius of the move from investment consultancy to fiduciary management is that it does not change the blame deflection dynamic described by O’Barr and Conley. When the wrong investment manager is appointed the pension fund can still blame someone else.

The problem for the consultants is that fund managers are also well used to playing the role of lightning rod. As Madonna will no doubt attest, when it comes to reinvention, deep pockets and diverse sources of revenues are also a great help.

Andrew Capon has worked as an analyst, strategist and financial journalist for more than 20 years, winning multiple awards for commentary on markets, investment and asset management. He welcomes comments from readers, including literate cephalopods, and can be reached at

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