Investment consultants have long been the bastions of transparency and accountability in the investment industry. However, when the torch was turned inwards, they became quite sensitive and shy.
Prior to publication of
30 June 2011 market share information, I gave the investment consultants a sneak peek at the results. I was in two minds about doing this...I knew I would regret the level of extra work that it was going to generate, but I wasn’t satisfied with the integrity of the information.
Well, what a revealing exercise. Four issues quickly surfaced:
- Data integrity (as suspected)
- Sensitivity to publication of factual information (add your own acronym or comment!)
- Definition of a client (ok, becoming difficult)
- Staff numbers (ok, different business models)
Data revisions – third time lucky
The first issue, both prior and after the sneak peek, was data revision. At first I found this humorous given the low tolerance amongst investment consultants for data revision by investment managers. However, it was getting pretty tiring by the third data revision for a couple of providers.
It was amazing to see how much attention was given to the data;
- Firstly, when I indicated it was to be published
- Secondly, when asking that investment consultants reconcile changes between current and prior data
- Thirdly, when providing comparative industry information
Perhaps that explains three data revisions!
The facts are the facts
The second issue was sensitivity to client numbers being published, or to put it more precisely, a sensitivity to the change in client numbers being published. Can’t say that this request drew a lot of sympathy...facts are the facts, at least after revision!
Since the start of 2008, the number of traditional investment consulting clients has fallen from 222 to 200. The biggest decline was recorded in the corporate superannuation segment reflecting a move to implemented consulting and full outsourcing. Consolidation has also seen a fall in client numbers across industry funds and retail superannuation segments.
The main growth segment was charities. There was also growth in the public sector superannuation segment, likely to reflect the use of multiple consultants and also some direct appointments by funds which have previously been primarily supported by State Government investment managers (
e.g. ESSSuper).
When is a client a client
The third item of contention was the definition of a client. My definition of a client is where the investment consultant is a retained advisor providing a broad range of services supporting multi-asset class investments (excluding implemented consulting). Also, my focus is on full service investment consultants, so some specialist consultants are excluded from my analysis.
Over the years, such definitions have become quite problematic. Asset owners appointing multiple consultants have become more common. In some cases, the level of activity and fees are little changed from that of a full service arrangement, thus it is quite reasonable to define the asset owner as a “full service” client. However, in other instances, asset owners are buying products (e.g. software, databases, research) or specialist services (e.g. dynamic asset allocation). This is where definitions become grey.
Different business models
The fourth area of contention was around staff numbers. My interest is the investment professionals that are relevant to the delivery of traditional investment consulting services. Amongst the top 5 investment consultants, no business model is the same. Consequently, it is difficult to properly compare the number of investment professionals across providers. It is very dependent of your particular point of interest.
Despite the contraction in the number of clients since the start of 2008, and the markets, we have seen net growth of around 17% (41 investment professionals) in staff amongst investment consultants. There has been enormous client pressure for consultants to increase the breadth and depth of services. Revenue must have grown more than modestly, supporting new appointments. This reflects modest growth in implemented consulting and the provision of new services such as dynamic asset allocation, research products and other specialist services.
So what does all this mean?
Well one conclusion is that investment consultants are actually human, despite the myths perpetuated by investment managers!
Assuming we can believe the numbers (sorry, one last dig!), the investment consulting businesses have been under pressure from outsourcing for many years, and consolidation more recently. Yet, they appear to have done ok in terms of revenue, particularly relative to the investment management industry over the period of the global financial crisis. However, ongoing consolidation and greater demands from in-house teams will continue to put pressure on the businesses and business models of investment consultants.