Consultants Retain Influence in Institutional Market

Nearly 70% of institutional assets were invested through consultant-intermediated channels in 2013, according to Cerulli Associates.

A recent report from Cerulli Associates, “Investment Consultants 2014: Partnering with Consultants to Provide Client Solutions,” shows consultant-intermediated business represents a growing share of investment management firms’ total asset flows. The report suggests asset managers and consultants are finding new ways to collaborate to meet the expanding needs and growing assets of all types of institutional investors, including defined contribution (DC) and defined benefit (DB) retirement plans.

“Business from a new client was the leading source of consultant-intermediated flows for more than 50% of asset managers polled,” explains Michele Giuditta, an associate director at Cerulli Associates, based in Boston. “It’s not surprising that asset managers plan on placing either the same or greater emphasis on cultivating relationships with consultants in the future.”

One-third of investment consultants polled by Cerulli believe they are facing increased competition due to new entrants in the outsourced chief investment officer (OCIO) space. An additional 38% of consultants consider the growing number of investment services providers a moderate threat to their business model, Cerulli notes.

The majority (58%) of consultants surveyed rank perceived new sources of expertise in alternative investments as at least a moderate threat to investment consultants. Additionally, more than half (54%) of consultants believe increased competition due to mergers and acquisitions among investment consulting firms is at least a moderate threat challenging their businesses.

The good news for investment consultants is that institutions in general are worried about how to navigate complex and volatile markets, meaning many institutions recognize the need for contracting additional investing expertise. Market conditions are driving institutional investors to seek fiduciary support from a variety of third parties—including asset managers, investment consultants/advisers, and dedicated OCIO providers.

Cerulli finds concerns about investment management fees and the value of active management persist in the adviser- and consultant-intermediated markets. Researchers observe that the widening range of low-cost index products available to investors—such as emerging market products, “smart beta,” and exchange-traded funds (ETFs)—has broadened to include investment categories and styles that were more likely to use active management in the past.

Many institutional investors and consultants view the use of passive management as an opportunity to lower fees and potentially avoid overpaying for alpha, Cerulli observes. As a result, passive assets are slowly becoming a larger component of institutional investors’ portfolios, presenting a larger opportunity for consultants and advisers.

One persistent opportunity for investment consultants is to help institutions evaluate active managers across asset classes and styles to ensure they are worth the higher fees compared to less expensive passive options. Consultants stated that on average they recommend approximately one-third (32%) of institutional clients’ assets be managed passively, Cerulli says. Consultants with whom Cerulli spoke generally believe there are active management opportunities across asset classes and styles, the report explains, depending on the quality of the manager and their strategies.

Looking specifically at retirement plans, Cerulli says the highest use of OCIO and consultant services can be seen among corporate pension plans. Going forward, Cerulli says half of consultants polled anticipate future penetration in this space under an OCIO service arrangement.

Cerulli points out that many corporate public pension plans are now closed or frozen, and they are often managed by an employer’s treasurer or chief financial officer (CFO), who may not have the expertise and time to properly oversee the portfolio. Accordingly, a number of plan sponsors are seeking the support of an outsourced provider for portfolio oversight, including pension de-risking services.

Taft-Hartley pensions are also starting to use the services of an OCIO, the report says. Nearly one-third of OCIOs surveyed expect future opportunities to support Taft-Hartley clients. Another 17% of providers polled believe potential opportunities exist to support clients with a sleeve of their portfolio under an OCIO arrangement.

Opportunity is not limited to corporate defined benefit pension plans, Cerulli says. DC asset growth continues to outpace other institutional segments, meaning OCIOs and consultants anticipate more penetration in the DC space. Opportunities exist for outsourced providers to support plan sponsors with designing the investment menu, Cerulli says, as well as with investment manager hiring and replacement. Consultants can also support DC plans on custom target-date fund or glide path development.

Information about how to obtain Cerulli reports, including “Investment Consultants 2014: Partnering with Consultants to Provide Client Solutions,” is available here.