Can I Trust My Institutional Investment Consultant?

Posted on January 11, 2016

Author Name By Mike Welker, CFA

In the world of investment consulting, accountability is an aspect of the relationship that you should expect. Of course, there must be trust between consultants and clients in order for a financial relationship to work, but that trust and accountability becomes even more necessary when dealing with the large numbers at stake within the accounts of endowments, foundations, and public pension plans.

So, why then is there a seemingly persistent issue with accountability and trust in the investment consulting world? In a recent article, Pensions & Investments magazine examined key factors that have aided in the growing concerns that trustees and plan sponsors face. From this article, we have extrapolated five key reasons why investors should demand and expect accountability from their institutional investment consultant.

4 Reasons Accountability is A Growing Concern Within Investment Consulting

  1. Consulting Firms are facing mounting pressure to be accountable across all aspects of an investment, which has led to consulting firms rapidly increasing their size. Plan sponsors, with their increased needs, have been seeking larger firms to keep up with their demands. This has led to smaller, even mid-sized firms being forced into mergers, becoming conglomerates. Though a larger consulting firm is not necessarily a poor choice, it can lead to a decrease in accountability. If size and scope ever overshadow the care that advisors are expected to maintain for their clients, then accountability issues are bound to run rampant. For this reason, many sponsors are best suited with guidance from firms that have the ability to maintain an attention to detail and level of care that may be sorely missing from larger firms.
  2. Investment consultants are scorekeepers, not true advisors. Many investment consultants have spent years acting solely as scorekeepers, making the transition to an advising role an unnatural and difficult evolution of responsibility. With sponsors and trustees now demanding a consultant that will connect the dots from their strategy to the hard numbers at the end of a reporting period, firms that have already made true advising accountability a part of their process will absolutely have an advantage.
  3. Advisors are now held accountable for not just their performance, but the performance of those they recommend. If a firm is not following fiduciary standards, there is no guarantee that they will recommend a manager with your best interests in mind. Always remember: a true fiduciary will only provide recommendations based on your needs, not their own.
  4. The relationships between consultants and money managers are facing increased scrutiny. If a consultant holds anyone, including itself, above the plan sponsors that they promise to serve, they should never be entrusted to appropriately provide counseling or advice. Non-fiduciaries can be swayed by kickbacks from money managers, leading to a choice based on their own financial benefits instead of that of the plan sponsor. Always stick to a fiduciary that is ready to be held accountable in order to avoid these major issues of trust.

Indicators have suggested that investors should expect accountability from their investment consultants. The trust between these parties is sustained on this expectation, which has risen, in recent years, to an all-out demand from investment trustees and managers. Given this fact, it is wise for trustees and plan sponsors to ensure that investment consultants can do more than just talk-the-talk when it comes to providing real value to investments, putting the needs of their clients above their own, as any fiduciary very well should.

Image courtesy of D. Hendrix via Creative Commons license.