One thing is certain: getting chosen by investment consultants is a huge business issue for fund managers.
Based on the data they examined, the authors calculate that attracting (or losing) recommendations from one-third of the investment consultants will drive, on average, an increase (or decrease) of 10 percent in the size of the investment product in a year. That 10 percent flow is equal to about $800 million, which if we assume annual fees and charges of 1 percent, would mean annual revenue of $8 million.
It is useful to consider why these consultants exist, and why plan sponsors use them. Partly it is a useful buying in of expertise in planning and risk management. They also clearly can act as a liability shield for trustees fearful of being held accountable by angry stakeholders if their choices prove disastrous.
But many naive plan sponsors may actually have bought into the return-chasing mind-set that pervades investment. They may believe that consultants, generally an impressive lot, actually can identify the magic dust which separates a Warren Buffett from an also-ran. This group needs educating, but will find only limited help on offer from the consultants charged with advising them.
Data disclosure is not what it should be.
“An obvious policy response by regulators, or a market response by plan sponsors, is to require full disclosure of consultants’ past recommendations so that such decisions are better informed and, as a consequence, their assets more efficiently allocated,” the authors write.
Just as it is in fund management, sunlight is needed in the investment consultant business.