There is a popular narrative that runs “investment consultants are struggling to retain their place and importance as super funds increase internal teams and become more self -reliant”.

To make things worse leading funds have been successful in poaching their favourite consultants to work in-house, e.g. Jonathan Stanford leaving JANA to work for HOSTPLUS, Kristian Fok going from Frontier Advisors to Cbus and Guy McAliece, former partner at KPMG moving to chief financial officer at First State Super.

Consultants would appear to be under siege, but speaking to the four biggest investment consultants tells a different story, as all are seeing annual growth in the number of advisory staff they employ.

JanaPerhaps the best way to explain the dichotomy is that funds are expanding at a more rapid rate than consultants which are getting a smaller part of the pie, even if their pie is getting bigger.

Consultants are also becoming less authoritative. A consultant’s recommendation to replace a manager that had underperformed for 12 months would once have been uncontested, says Russell Mason, head of superannuation at Deloitte, and a leading manager of tenders for investment consultants.

“That is just not acceptable anymore,” he says. “No trustee I know blindly accepts the recommendations of an asset consultant.”

The advent of investment committees with independent consultants and advisers has played a role, but so has the trend towards hiring a range of consultants.

“The day of the broad based generalist has largely gone,” says Mason, who talks of a growing willingness to shop around for the best consultants for different areas.

“They will say ‘x is very good for research, but y is very good for DAA’.”

It would be wrong, however, to say all funds are signing up to this approach.

“I have had one fund say to me recently we only want to use one asset consultant,” he says. “We do not want to run the risk of conflicting advice and we believe we have enough internal resources to complement the asset consultant.”

Consultants speak

We put these issues to the heads of practices and chief executives of JANA, Frontier Advisors, Mercer and Towers Watson – all agreed to speak, but Russell turned down the request. Following a takeover by the FTSE group, there is a broad expectation in the industry that Russell will be repositioning itself in the market and this would explain its reluctance to comment.

To the view of the sector presented by Russell Mason above, there is partly acceptance and partly challenge.

Towers WatsonIan Patrick, general manager at JANA says: “It is over simplification to say the generalist is dead, their skills are still incredibly important.” He cites charities and insurers needing generalists, but also the way any investment committee will need assurance on their strategy from a generalist.

The polar opposite view comes from Graeme Miller, head of investment Australia at Towers Watson, who sees the specialist route developing and sees his firm now as an extension of its clients’ investment teams. The implication appears to be that moving away from generalist to specialist advice is more interesting work.
“We view the expansion of internal teams at our clients positively, because as they have added more resource and depth to their team that has enabled them to extract more depth from their consultant. In most cases it has led us to having deeper, more value adding, stronger relationships with our clients,” he says.

The end result is that Towers has hired more specialists and Miller is confident that no matter how large their clients grow the “global investment universe is vast and you cannot cover it all”.

A similar tale comes from Graeme Mather leader of Mercer’s Asia-Pacific investment consulting practice, whose firm identified the trend for super funds to merge five years ago as the biggest threat to its business.Froniter Advisor

The decision was then taken to diversify its client base, but also to establish a growing array of specialist departments. Five years later, Mercer now has 17 insurance fund clients, 25 endowments, a foundation and is offering research to financial advice dealer groups. Using a combination of global and local initiatives it also has specialist teams for dynamic asset allocation, infrastructure, property, private equity, responsible investment and investment operations.

Mather is naturally pleased. “Specialisation has been an incredibly successful strategy for us, we now work with nine out of the top 10 investors on a retainer basis,” citing work being carried out at AustralianSuper, QSuper, the Future Fund and QIC.

If this sounds a threat to other consultants, then they should be worried, as Mercer is expanding its range of specialisation organically and through the acquisition of a specialist firm.

“We have freedom and flexibility and a reasonable amount of economy to make acquisitions in this market and to hire in different areas,” says Mather.

Coping with the specialist firms

Consultants are not only coping with more self-reliant clients, but also the rise of specialist consultants such as Stepstone and Albourne.

There is a clear split on how thMercere big four consultants view this threat. Mercer and Towers Watson are combative, taking an “anything they can do, we can do equally well” stance, while JANA and Frontier are more accepting of the trend.

“We can and we do compete with the specialists,” says Mather. “When someone is looking to select a manager for private markets we are typically on the shortlist.” He cites Mercer’s acquisition of SCM and Sovereign in helping with private equity and the acquisition of Evaluation Associates and Hammond in helping with hedge funds.

Miller is taking this challenge to heart and lists a number of ways that Towers Watson can compete. Its private markets’ team is larger than it has ever been before, and is as “deeply resourced and as experienced as most of the boutique organisations”. It has been engaged exclusively to provide alternatives’ advice and that having investment teams sitting on the ground in all the major financial markets gives its clients a significant advantage.

Patrick questions the predominance of this trend towards specialists and sees it largely limited to private equity and hedge funds – notably its client Telstra Super uses JANA for everything else except these investments.

While for Damian Moloney, chief executive of Frontier Advisors, this is not the prize. He is phlegmatic about competition.

“There are other firms who are good inHeadcount other areas of the market so that is fine. Clients are getting pretty smart about trying to pick the best in certain areas and we are really committed to being best at what we want to do too.”

He states that Frontier’s value is in working across the strategies and researching traditional manager sectors. Notably, Frontier’s business partnership with Segal Rogerscasey in the US and LCP in the UK has broadened the depth of its manager research.

Unique to all the four consultancies, Moloney talks of the role of technology in helping Frontier clients with increasingly complex needs. The idea is that the most common general advice, such as manager research, scenario and stress testing, manager compliance, fees reporting plus general data is now freely available to clients online, some of it through proprietary software.

“We have changed from a relatively standardised way of doing things with clients, to a completely customised way of doing things,” he says. “They have each got different objectives, cultures, different portfolios and approaches.”

Has regulation increased the demand for services?

All four of the large consultants have reported a growth in demand for their services over the last few years, but while some are happy to admit the growth in regulation as being a by-product of this growth in demand, some see it as an affront to their reputations as sophisticated professional services firms.

Graeme Miller at Towers Watson says: “We position ourselves further up the chain than pure compliance,” stating that while SPS530 has created extra work, such compliance has always been seen as standard and not an extra fee generating service. “We have not charged our clients one cent more as a consequence of this,” he says.

While Ian Patrick says only the scope of Jana’s services have changed as a result of regulation, such as the annual strategy review and the stress tests, but that it has not produced a growth in demand for their services. He sees the demand for advice on retirement and co-investment deals has had a far greater impact.