The top five investment consultants collectively provide advice (excluding implemented consulting) to around 200 clients and over $650 billion of assets. Whilst client numbers have contracted around 10% over the past three years, the number of local investment professionals within the top five investment consulting businesses has expanded around 15%.
Over this period, consultants have followed their clients into new asset classes and investment opportunities. The ever increasing diversification of investments has been a big driver for the expansion of investment consulting research activities and associated support services.
Assuming the consultants haven’t been willing to cut their margins and there isn’t a price war going on, then revenue per client in very rough terms increased by over 25% in real terms to preserve the status quo (yes, a very simplistic analysis that would never pass the scrutiny of an investment consultant!).
However, my point is that whilst we have seen a contraction in their primary client base of superannuation funds, demand for investment consulting services has increased substantially.
Do you really want to know what you don’t know?
Often when funds are starting to think about hiring an internal investment person, the trustees expect that this cost may be partially off-set by lower investment consulting fees. Many years ago, I hired an in-house lawyer and quickly learned a lesson regarding hiring professionals (regardless of discipline). Unfortunately, they know what they don’t know, and want to hire the best to get the answer. Well, in my view ignorance is bliss, and can save you a fortune (at least in the short run!).
So clearly, the evolution of the internal investment
team (
yes, a single internal investment person is a temporary aberration) has not slowed the demand for investment consulting services.
However, will the next phase of inevitable consolidation be so comfortable for investment consultants, or will their business models be seriously challenged?
Conflicts impacting transparency
Investment consultants, keen to preserve their revenue and support their clients, are now advising on acquisitions of individual assets. This creates the potential for conflicts between clients of the investment consultant, as separate clients may be bidding against each other and they may all expect advice and support from their investment consultant.
Some investment managers are also privately concerned about the information they share with investment consultants. An investment manager may be bidding for an asset, and the investment consultant may be advising one of its clients on a separate bid for the same asset. The situation can be further complicated if one client is already invested in a manager’s product that is potentially bidding, whilst another client is seeking to bid directly for the asset. There are many permutations to this theme; all present challenges and are without clean solutions.
Three’s a crowd
Prior to the advent of the internal investment team, the investment consultant was king. The trustees would meet quarterly or more frequently with the consultant to hear their wisdom and make investment decisions. Today, key investment decision are often delegated to an investment committee with both the investment consultant and the internal investment team providing advice, recommendations and opinions.
This tripartite arrangement can become confusing if there is a lack of clear accountability and responsibility. The confusion is often a legacy of history with the various parties taking time to get comfortable and understand the new operating model. In other instances, roles and responsibilities have not been clearly defined.
The consultant often has the dual role as adviser to the internal team as well as adviser to the investment committee. Whilst this dual role has its relationship challenges, its real damage is likely to be on the business models of investment consultants over the long term. This dual role has resulted in the rapid expansion of research activities, and associated staffing levels and costs to keep pace with the diverse needs of clients. To date, these changes have been relatively comfortably absorbed by the investment consulting industry and consultants, in the main, have preserved their full service generalist business models.
Shifting the balance of power
Over the long term however, I expect that the consultant will primarily become a resource of the internal team and will have far less direct contact with the investment committee. There may however be investment consultants who act as independent investment committee members, yet I expect they will not be a representative of the primary investment consultant (if there is such a thing as the primary consultant). This will be a challenge to the ego of the investment consultant, as well as their business models and will impact the attraction of the investment consulting profession for some.
Internal investment teams will be far more selective about their investment consulting requirements and will likely have multiple specialist providers, including investment banks and other transaction oriented businesses providing specialist support.
As demand specialises, consultants will need to adapt their business models and research activities in line with their strengths. Over time, the generalist full service consulting model that we see in Australia (yet less prevalent elsewhere), will likely disappear for all but the very largest investment consulting businesses.