With superannuation funds merging, large funds building their own investment teams and the continued outsourcing of corporate funds to master trusts, Australia's asset consulting industry is being forced to adapt.
Traditional full-service asset consulting to superannuation funds included advice on asset allocation, selecting assets and managers, and measuring risk and performance monitoring.
David Neal, head of the asset consulting practice at Watson Wyatt, says the move to in-house investment teams is "as much an opportunity as a threat" to full-service asset consultants.
"Our experience globally is that as funds take on internal resources, they actually have a higher demand for good-quality input. While they may not require the full service, they are generally hungry for specialist input, and they certainly look to extract a lot more value out of a consultant," Neal says.
What this means, he says, is "much deeper relationships" can be built. "The funds that go internal still constantly need to understand and refresh their decision-making processes and they still need sources of research. We find that we can build much deeper relationships with internal-resource clients. It's much easier for us to be able to provide our intellectual capital to those sorts of organisations and they're generally hungrier for it."
While the very big end of the market - the 'mega-funds' - requires more specialist input, he says the "sweet spot" for asset consultants is below the mega-funds, at about $1 billion to $15 billion in size.
"At that level, they generally have what I call a 'virtual' investment team: they might have two or three fairly senior investment executives, but they need the support of a fairly broad research base. They realise that they can't cover the globe of investment opportunities, it doesn't make sense for them to try to do that," he says.
Russell Investment Group director of consulting Andrew Lill says the quality of interaction with an internally-resourced client is better. "We now have more informed two-way conversation, which is great. It's much higher-calibre interaction. The discussions now revolve around 'why and why not' rather than 'where and when and what'. Ideas are being floated from both directions and being commented on by both parties," Lill says.
"We don't feel anymore that we have the mandate simply to tell a client what to do, which is actually a good thing, because in consulting there is no one solution, and you need to have the client understand the range of options available to them before they come to the right solution."
Frontier Investment Consulting deputy managing director Kristian Fok also cites the improved interaction, but sees it as just as beneficial to the consultant. "As a consultant it's always good to have other points of contact that are also very smart and have interesting ideas. It also helps us - we find it very refreshing and challenging," Fok says.
Fok says Frontier embraces the move to internal investment teams. "Not only do we recognise that this is where the market is moving, we think it actually has some advantages for us. We've had discussions with some of our larger clients who are in a position to do that and actually encouraged them to do it, because we can then be more strategic in the niche services that we offer," Fok says.
Ray King, managing director of specialist alternative investments consultant Sovereign Investment Research, agrees. "The people who are creating internal teams are being more innovative and sophisticated about how they structure their investments. They're being more strategic. That's great for us, because we specialise in alternative investments," King says.
"Before, the fund trustee just wanted to deal with one asset consultant, whereas an internal team is much more attracted to the idea of having multiple consultants. We're finding that where an internal team is created, it's creating opportunities for the niche consulting houses like us and Access."
But one definite problem for the asset consultants in the internalisation of investment expertise by large super funds is that it is another source of demand for talent. "Whereas we used to source staff from the investment management community and the consulting community, there's now a third element," Simon Eagleton, business leader for Mercer Investment Consulting in Australia and New Zealand, says.
"There's an extra player in the war for talent, which means greater demand on a limited talent pool."
In the people sense, King agrees internalisation is a threat. "There's no doubt that it has really tightened up the market, because the internal teams are paying very competitive salaries. Also, I think the one-client environment is a lot more comfortable for many people than the multi-client. It's easier for many people to work as a consultant in an internal team. But in the market sense, it isn't really closing down market opportunities because most of the people who are creating internal teams are also employing asset consultants," he says.
While there is increased concentration at one end of the market, at the other there are potential newer sources of business for asset consultants. Although the industry grew on the back of superannuation funds, consultants say it is not much of a leap to advise other wholesale investors.
"We see ourselves very much as providers of serious investment competency to wholesale purchasers. In effect, super funds are merging into the broad-based financial services business. Those areas are definitely a potential market for consultants. For example, we provide manager research to ipac, which is a kind of dealer group. If groups like that are substantial in scale and they are looking for high-quality input then yes, they're a potential customer," Neal says.
Eagleton says the asset consulting industry has known for some time that rationalisation would occur in the superannuation side of the business. "There's many fewer stand-alone super funds today than there were five years ago. So while superannuation remains an important side of our institutional consulting business, it's by no means the dominant part. We consult to insurance companies, to foundations, charities, university endowment funds. These are very significant public sector pools of assets, and are very important parts of our business on the institutional side," he says.
"The retail market - by which we mean the dealer group and platform market - is also a very strong growth business. Alone among our institutional consulting competitors, we have a team of people and a range of products and tools and consulting services explicitly targeted for servicing the dealer group community."
The notion of a consulting business having products in the market is the fiercest bone of contention in asset consulting. Some consultants - most notably Mercer and Russell - long ago moved away from fee-for-advice consulting and began to offer multi-manager products to their consulting clients.
Either that or they moved into implemented consulting, where the super fund outsources its entire investment operation to the asset consultant who then takes responsibility for the investment strategy and the choice of the investment managers.
Implemented consulting is now responsible for the management of an estimated $11 billion in superannuation assets on behalf of 60 companies and their in-house super funds.
The link between consulting and products is a sore point among the remaining traditional consultants. "It's something we feel passionate about. We believe strongly that it very clearly compromises the advice and quality of service that clients can expect to receive. We research multi-manager funds and it's evident to us that conflicts of interest exist. The funds have a very strong bottom-line incentive to hire a cheap manager rather than a good manager; and it's very clear to us when you look at the results that they are not delivering," Neal says.
He says surveys such as those done by Counterpoint and Chant West make it clear multi-manager funds end up hugging benchmarks. "They have a clear incentive to not underperform, because they wish to minimise their business risk. The money they have is generally 'sticky' money, as long as they don't do anything stupid with it. The last thing they're going to do is take risks, so of course the client doesn't get the performance. The alignment of interests is clearly skewiff, and we don't understand how they can defend it."
Implemented and multi-manager consultants rebut this view. "When we get a new client, it's clear what they're asking for," Alan Schoenheimer, managing director of Russell in Australasia, says.
"If a client has hired us for implemented consulting, there's no conflict of interest where you've declared up front that you are offering a particular service in the marketplace, and that's what they buy. It would only be a conflict if they bought traditional consulting, and we tried to say to them 'look, the only way to implement all this is to buy our products'. It's actually pretty insulting to our clients to think that they could be tricked that way."
In fact, Schoenheimer says, there is a potential conflict the other way with traditional consulting. "I believe that some of their smaller clients are trying to do things that really they shouldn't be doing. Because the only implementation route that a traditional consultant has is to advise people to hire managers, that's what they advise them to do," he says.
"But if it is a $100 million to $200 million pool of capital, that's actually not the best advice - the best advice is to invest in a multi-manager product, because $100 million to $200 million doesn't get you six asset classes with three managers in each. These smaller clients should actually be fully implemented, but they're not, to their detriment. We think that's actually conflicted advice."
