Consultants 'a waste of money'
Consultants in the Nordic region still have a job convincing pension funds and institutions to use them. Unsurprisingly, large organisations remain their main employers, particularly when mandates involve global equities. Even so, their use is often limited in scope. “Sometimes the big institutions use consultants as just a screening mechanism and then they take over afterwards,” says Morten Schou, head of portfolio management at Danish asset manager Gudme Raaschou. Still, despite it being an embryonic market, consultants are used and within the four countries there is plenty of scope for further business, perhaps reflected by the number of small, local consultancies springing up.
For Steen Villemoes, at the Danish engineers’ pension fund, as investment moves towards an active approach, so the need for consultants to carry out asset liability and asset exposure studies grows. “I think it’s very sensible, sometimes even necessary, to take on consultants. It’s a very good idea just to have a fresh look at what you’re doing,” he says. This is not a unanimously held view, though. Another manager is shocked at the prices some consultants charge and says that some of the services on offer appear little more than hot air. The size and intimacy of the Nordic markets provide ammunition to critics. “You know the names, you know the players. Consultants are a waste of money,” says one Danish asset manager.
Not everyone is so cynical and the use of consultants in becoming more common, particularly for manager searches. Here there remains a problem and that is one of coverage. Villemoes agrees that, for manager searches, a third party is useful but that international consultants are unlikely to cover all the local asset managers. “If local managers are not for some reason included in whoever’s manager universe, then it’s just tough luck and there’s a potential bias problem there,” he says.
Bias aside, you’re also overlooking local expertise and this is why local consultants are thriving. Local managers are often cheaper as well.
Increased demand has produced numerous start-ups and expansion by existing consultants. Sweden’s Wassum is probably the best example of the latter. It took on Anneli Enquist following Mercer’s decision to close its investment consulting operation in Stockholm. Mats Langensjo, previously head of investment at Mercers, joined Wassum from Indocam to focus on Sweden, allowing head Jan Waage to concentrate of the Nordic region. Wassum is opening a Helsinki office next year and this June opened an office in Oslo. Olav Overland, head of the Norwegian operation, says legislation coming into effect next month will swell the savings market and speed to move to a defined contribution system. One of the greatest obstacles according to Overland is getting the message across to the locals, as they are not used to employing consultants.
Elsewhere, Jorgen Leschly has left SkandiaLink in Copenhagen to launch DCG Consulting and a handful have deserted Storebrand in Norway to set up Benefit Network. The Nordic markets are a great breeding ground for such consultancies as barriers to entry are low while average mandate size prevents the large consultants steamrollering smaller outlets. Says Overland, referring to the larger consultants: “Scandinavia is a bit tricky to get into. You have to have a really good knowledge and understanding of the market and a lot of the mandates are really too small to be of interest to some of the big consultants outside Scandinavia”
It’s not all doom and gloom for international consultants though and in Sweden, many of the municipalities have used them for manager selection (albeit perhaps out of necessity). PPM’s default fund, the 7th AP, used Watson Wyatt for asset allocation strategy and Mercers for manager selection. PPM has also sought advice from KPMG and Wassum in setting up the system.
Perhaps the least developed market is Finland, where demand for actuarial consulting is fairly low and for investment consulting, almost non-existent. Large institutions employ their own actuaries and investors, while the small ones tend to use either Pensionservice (EPS) or Porasto, the two main Helsinki-based consultancies. Most pension foundations use the consultancies for information on actuarial standards, such as FAS and IAS, and financial regulations.
EPS, which provides actuarial services for around 20 foundations and to some extent for pension insurance companies, produces 10-year solvency forecasts. “Many of the institutions also order different scenario models but most of all actuarial services are outsourced to the consultancies,” says Eero Gauffin, managing director of EPS. Consultants will find themselves in greater demand due to structural changes to Finnish business and also thanks to the numerous, complicated judicial regulations. Recession at the beginning of the 1990s closed many optional pension foundations in Finland and assets have been moved to pension insurance companies.
“Change is at hand, though,” says Synnöve Hesso, director of EPS, referring to a working group looking into the situation. Porasto, working for over 30 institutions, was looking forward to the committee’s work earlier this year, but is now more sceptical as progress has been slow. At the moment, a company cannot move its assets from a pension insurance company to start a new foundation; instead, the assets stay with the insurer and the foundation has to start from scratch.
“Porasto is more interested in setting up new foundations rather than in competing over the existing ones,” says spokesman Vuokko Ryöti. The consultancy is helping Finnish fund manager Evli set up its pension foundation, which should be in business next year. “As soon as the regulations have been changed there will be new foundations emerging, as it is less expensive to run a foundation than have one’s assets managed by a large company,” forecasts Ryöti. Despite the lack of investment consultants in Finland, there is a growing need for them and when they come, they look like getting a good reception.
Says Kari Joutsa, of the Pension Fund for Pharmacists: “I am looking forward to these services, it would be really good to get an opinion from an outsider, rather than just leaving it all in the hands of the asset manager.”