German investment consulting is going through a period of rapid change with international players buying local firms and local consultants vying for business abroad.

Considering that the investment consulting industry is only a decade old, a lot has happened in the past few years, even though the market continues to prove difficult for foreign players to penetrate.

Despite its rapid development most agree it lags many European countries in terms of investment advice, partly because of the prevalence of the book-reserve system but also because of the former dominance of large domestic banks for asset management services.

Herwig Kinzler, head of investment consulting in Germany, agrees that the environment is changing with more players coming in offering new forms of services, but warns that the talent pool remains limited as investment consulting is still new. He says the competition among the companies is patchy with Mercer competing against actuarial consultants and asset managers and investment banks on the ALM side and on manager selection with some of the local players such as Alpha Portfolio Advisors on the manager selection side as well as Watson Wyatt.

Foreign consultants have been present for some time, initially providing benefits and actuarial services, but few have made serious inroads into investment consulting. This has lead to partnerships and tie-ups the recent flurry in acquisitions.

Earlier in the summer of this year, Watson Wyatt Worldwide bought Dr Heissmann, one of Germany’s leading actuarial firms, in a bid to strengthen its position in the growing market. The company is now called Watson Wyatt Heissmann.

At the time John Haley, president and chief executive officer of Watson Wyatt said: “The integration of the two firms enhances our strong position in Europe for financial and human capital management consulting.”

Babloo Ramamurthy, Watson Wyatt’s European region manager, added: “Heissmann is an excellent strategic and cultural fit for Watson Wyatt. Bringing the two organisations together takes Watson Wyatt’s position in Europe to the next level, enhancing our ability to service our clients as well as creating excellent opportunities for all our consultants.”

Through the acquisition Watson Wyatt also received Heissmann’s subsidiaries in the Netherlands France and Austria. Heissmann is headquartered in Wiesbaden and was established in 1955. It employs 360 staff, 300 of which work in Germany. The firm’s total annual revenue stands at more than €50m.

Towers Perrin also made a similar move in Germany with the acquisition of the consultancy Rauser. Heubeck, the actuarial consultants also linked up with a domestic player, Sparkassen-Finanzgruppe, in July and last year Feri Finance Group, the parent of Feri Institutional Advisors, the investment consultant, was bought by MLP, a German financial services adviser and broker.

Apart from acquisitions elsewhere in Europe, Watson Wyatt also established a joint venture with Institut für Finanz und Aktuarwissenschaften (IFA), a German insurance consultancy.

Thomas Köpke, practice leader investment consulting at Watson Wyatt Heissmann, says the history of German investment consulting reads almost like his own CV.

Köpke started his career at Allianz, one of the largest in the world. “I was there between 1994-98 and at the time there was not really any investment consulting business in Germany. The advice was on the liability side but no investment advice,” he notes.

After Allianz Köpke moved to Feri, the consultancy, at a time when a few, small local teams left asset managers or insurers to set up investment advice consulting firms. “The teams worked with convincing corporations to not only ask questions on the liability side but also on the asset and investment side, leading to strategic and asset management advice,” he says.

He says that, in the beginning the advice was domestically orientated as it was a very relationship-driven industry and investors wanted to stick to local players. “Eventually there were questions on whether or not it would not be better to look at a broader field of managers, including foreign players. This led to the development of the industry. Larger corporations started looking at global players such as Mercer and Watson Wyatt in London for advice, but that was not practical in the long run. The next natural step was for the global players to establish a local presence,” Köpke says.

Investment consulting teams were established from 2004 onwards. Köpke says that now Watson Wyatt, with the added strength of Heissmann, is in a good position to service large international corporations that want to establish in Germany as well as German firms that are going abroad. “We can now do both sides of the coin with local people and global resources. Heissmann has a number of local clients who want international knowledge and Watson has a number of international clients that want local knowledge,” he says.

Köpke expects more consolidation in the industry as sophistication and complexity of investment grows, with clients demanding a broader range of services. “We want to concentrate on larger clients and clients who need international advice, alternative investments and full-service projects,” he says.

Kinzler says Mercer wants to introduce its implemented consulting model to Germany and believes clients are accepting that in an increasingly complex world ongoing advice makes better sense than ad hoc projects.

Watson Wyatt Heissmann has 14 people concentrating on investment advice, compared to Mercer’s 12. Köpke notes that although that might sound small, few have larger teams with a pure focus on investments.

Much has been made of the logistics of integration at the new entity made up of the two companies but Köpke is convinced the teams will be a good fit and work well together.

Heissmann continues to keep its base in Wiesbaden and Boy-Jürgen Andresen will continue to head the firm. Andresen, who turned 60 last year, is also chairman of German corporate pensions association aba.

Alfred Gohdes, managing director at Heissmann who was in charge of the consultant’s foreign expansion, is also expected to remain a high-ranking executive in the future Watson Wyatt Heissmann. Bernd Haferstock is Köpke’s counterpart at Heissmann.

As international players are clawing to get a foothold in Germany, domestic players such as Feri Institutional Advisors (FIA), are looking to expand abroad.

Dirk Söhnholz, managing director of FIA, says its next step is to expand in Switzerland. “Our main business is in Germany and Austria but we also have clients in northern Italy as well as the UK. We are actively pursuing international expansion and are currently hiring consultants for Austria and Switzerland.” Söhnholz declined to specify other countries it wants to expand into as the discussions are currently only internal.

Feri has an implemented consulting model, where it offers a broad range of services such as asset allocation, ALM, manager selection, customised multi-manager solutions and research.

Söhnholz adds that Feri is one of the few with strong in-depth capabilities in alternative asset classes such as hedge funds and private equity. “We have expertise in a broad range of investments such as real-estate, commodities with a 20-strong team of researchers, which includes traditional asset classes as well,” Söhnholz adds.

He notes that in terms of absolute growth of alternative assets, German investors lag others in Europe but says there has been a significant upturn in interest for education and discussion of the various options.

The interest in alternatives is only one example of the evolvement and sophistication of the German institutional investors, with more seeking professional advice.

Söhnholz says the consulting business is likely to continue to change and most will most likely continue to consolidate into three groups of advisers.” Going forward we will see new players such as investment banks offering advice, but also large global consultants trying to increase their presence combined with small local players. I see Feri as a large continental European multi-asset specialist which does not fit into the usual boxes.”

Söhnholz says that most local players do not have the breadth and depth in research as his team does. He says that the competition comes from larger global players such as Mercer and Watson Wyatt, who tend to have large corporate clients with whom they have global service agreements.

He rejects the idea that Feri is losing its position in the market, saying that although it may be losing market share per se, in absolute terms the firm is still adding clients as the German pension pie keeps growing.

“As the investment universe is increasing in complexity with boundaries between asset classes blurring, clients are increasingly looking for advisors that cover all areas in order to get the best advice.”

He believes that regulation changes, such as liberalisation of investments in hedge funds from 5%-10%, will continue.

Kinzler says that although the move to fewer quantitative rules is good, the current rules are not as restrictive as they may seem on paper. “If you look at the actual average hedge fund allocation, which is 0.3%, there is a lot of room for expansion. Even on the traditional equity side, where the limit is 35% and the average allocation 20%, there remains room, so the restrictions are not actually hurting anyone.”

He argues that changes come without regulatory changes as large multinationals want to adopt the same rules globally.” Their guidelines would be implemented in Germany eventually, perhaps with a time lag. In addition, changes come as smaller and mid-sized pension funds tend to compare themselves to family offices, which use alternatives and which have a broader diversification of their portfolios in general.”

Kinzler adds that if a pension fund or institution can argue and prove that it has a sound risk management and liability coverage the quantitative restrictions can be overruled.

He concludes that it is easy to blame the regulator but in most cases the asset allocation among German funds is more a result of lack of knowledge or resources.