A growing number of consultants are moving into asset management or so-called implemented consulting — where investment advice and funds management are combined into one service. Their aim is to cater for the ever-rising demand from super funds looking for help in managing their investments more efficiently and in navigating their way through an increasingly complex investment environment.
Mark Thomas, director at van Eyk Research, believes margins in implemented consulting can be anything from 20-40 points and that the implemented vehicles account for one-quarter of the revenue at the larger asset consultants. This ratio is expected to grow dramatically over the next few years.
A study by PricewaterhouseCoopers, completed in October 2000, shows that of the 250-odd researched super funds, one-fifth moved from a balanced (or a combined balanced and specialist manager investment) structure to a purely sector specialist approach between 1997 and 1999.
Those funds in the survey using sector specialist managers are missing out on $380 million a year, or 0.88 per cent on an asset weighted basis, as a result of poorly implemented investment decisions.
Whatever the actual size of implementation leakage — critics draw attention to the correlation between a company’s advocacy of implemented consulting and their estimates on the extent of implementation leakage — super funds are faced with two essential choices. Trustees can seek the benefits of an implemented consulting service to implement an investment strategy and offer investment advice. Or they can go back to using balanced funds.
In this context, providers of implemented consulting will play an increasing role in the lives of super funds.
Mercer national practice leader Tony Cole notes that implemented consulting has traditionally been confined to the smaller super funds “who can benefit from economies of scale by pooling funds, cheaper costs and access to sophisticated research and managers”.
However, BHP Billiton’s decision to award Frank Russell a $2.7 billion implemented consulting contract — billed as the largest outsourcing deal in Australian superannuation history — shows that implemented consulting is no longer confined to the small and medium funds.
According to BHP Billiton Super Fund general manager Colin Wirth, the decision to extend Russell’s role to that of implemented consultant is the natural next step. “The trustee considered the market position and the commercial reality in coming to its decision.”
Mercer’s Cole says the growing attraction of implemented consulting to trustees of larger super funds is due to the growing complexity of markets, investment specialisation and the “sheer burden of undertaking due diligence”.
In Australia, four providers probably account for more than 95 per cent of the implemented consulting market — a market Thomas estimates to be worth between $10-$15 billion.
MLC probably has more than half the market, with Frank Russell the next largest. InTech and Mercer are the other two significant players in the market.
While asset consultants are adding momentum to the implemented consulting market, fund managers, particularly those with multi-manager backgrounds like MLC, are expected to join the fray in increasing numbers.
For trustees of funds, the big decision in considering implemented consulting is whether to trust their asset consultant to also be their fund manager, or their fund manager to also be their asset consultant.
The line between the consultants and asset managers is blurring, as consultants move towards setting up master trusts, establishing multi-manager funds on the retail side and even launching their own funds.
The move away from general actuarial and super consulting is controversial, not least because it frightens many funds managers who highlight the conflicts of interest that arise when a consultant asks a fund manager to pitch and then presents against that fund manager, or when a consultant goes beyond making a recommendation and appoints the manager themselves.
The issue of whether implemented consulting is in itself a breach of trust and leaves a gap in the provision of independent advice to super funds will have to be resolved, especially given the growing pressure on trustees to monitor corporate governance issues more seriously.
There is little doubt that implemented consulting can tempt providers to pressure existing clients into the implemented service and push their implemented product to the detriment of other more suitable alternatives. It is how the implemented consultants manage such temptation that will test its future growth.
Already, funds considering implemented consulting are looking for an independent source of advice, without any interest in funds management, to pick between the different providers. Some are even turning to the larger accounting firms or other independent consultants to be the new gatekeepers.
