Consultants reject information probe
One of the key characteristics about Germans is that they like solving problems by consensus. But as some German asset managers are finding the method is not always effective.
Last summer these managers had a problem with consultants, who are increasingly playing a key role in the awarding of mandates, particularly those from bigger pension funds. The managers’ gripe was that while they, in bidding for mandates, must fill out volumes of questionnaires from the consultants, the consultants themselves are not nearly as transparent.
The managers felt that if the consultants were more transparent, it would promote goodwill and make it easier for them to understand why they were not selected for an investment mandate. They therefore asked their lobby group, the BVI, to invite consultants to discuss their complaint and reach a consensus on what to do.
After a first joint meeting, the BVI unveiled a questionnaire for consultants which sought detailed information about their business model, pricing, profitability and rank in the institutional market.
While it must have known that the questionnaire would resemble a tit-for-tat action, the well-meaning BVI was nonetheless taken aback by the consultants’ reaction. With the exception of Watson Wyatt, which has shown a willingness to co-operate, they were suspicious and some were outright dismissive. The majority indicated that while they would return the questionnaire they would not provide any sensitive information on areas like profitability, type of mandates or specifics on their
business model. Translation: these consultants, including domestic players Feri, Faros and Heissmann and international firm Mercer, will supply information that is already more or less known in Germany’s institutional market.
Alpha Portfolio Advisors, the current high-flyer among German consultancies, dismissed the questionnaire outright. “We don’t really see the point of this, as we are already as transparent as we need to be,” says Christian Schlenger, managing partner and co-founder of Alpha. “Also we cannot take valuable time away from our clients.”
Another consultant says: “Part of the motivation for the BVI questionnaire is the frustration of some German managers. In the past, they have had no problem getting business as the banks behind them did everything for the investor. But as the investor has made us more crucial to the mandate process, they have lost market share.”
The upshot is that despite culturally correct intentions, the BVI and the managers behind it will likely end up none the wiser about the consultants they deal with. “We were dubious from the start,” recalls one Frankfurt asset manager. “Back then, we asked: ‘Do you really think the consultants will co-operate?’”
Rudolf Siebel, BVI managing director in charge of the questionnaire, has not responded to the latest developments but last summer he said: “We estimate that most consultants will provide more information than we can obtain by, for example, visiting their websites.”
Despite a disappointing response from the consultants in late January he said: “What we’ve done is begun a permanent dialogue with the consultants. Our questionnaire is just a part of that process.”
There are two explanations for why the consultants are not willing to show much co-operation on the BVI questionnaire. The simple one is that since most of them are not listed companies so they are under no legal obligation to disclose the sensitive information wanted by the managers. Indeed, the only obligation they feel is the one to the investors who hire them.
“The best way the managers can gain the most from us in terms of transparency is to get to know us professionally,” says Dirk Söhnholz, managing director at Feri, says. This sentiment is shared by Alpha.
But the reluctance of consultancies to co-operate is not only because they don’t have to. It is also a reflection of their growing strength. According to new estimates, consultants now steer around one-third of allocations in Germany’s institutional market. This is double the figure from three years ago.
The past two years were particularly good for consultants as an increasing number of institutional investors used them to diversify out of Germany and Europe and to maximise returns.
Consultants have also benefited from a boom in external pension funds created by large listed firms. Alpha, for example, has racked up 51 mandates for asset manager searches since January 2005, the most of any consultant in Germany. The underlying value of these mandates is €3bn. Meanwhile, Feri added 20 clients in 2006, bringing the number of institutional assets it advises on to €305bn.
Among foreign houses, Mercer has won at least €25bn worth of mandates for asset manager searches and other services to date. And Watson Wyatt, which opened a Frankfurt office in October 2005, says it is on track to win €3bn worth of mandates for asset manager searches by mid-2007.
Jochen Kleeberg, Alpha’s other co-founder and managing partner, sees no end to the upward trajectory that consultants find themselves on. “The challenges for investors like pension funds are considerable,” he says. “Interest rates remain low, equities are due for a correction after a four-year bull run and liabilities are increasing because people are living longer. As a result, they need the kind of demanding solutions that consultants provide. These range from complex asset-liability studies to dynamically adjusting their investing and finding asset managers for exotic asset classes like hedge funds and commodities.”
But just because the consultants are in a position to ignore the managers’ requests for more transparency, it does not make the managers’ concerns any less legitimate. Managers say that while beauty contests for investment mandates are generally fair and marked with goodwill, the process can be nerve wracking.
The fact that information requirements from consultants in beauty contests can vary considerably adds to the managers’ frustration. The requests for proposals (RFPs) are thick volumes and are very diverse. For managers, this makes the mandate process very time-consuming and complicated and even then there is no guarantee of a win.
“How would you feel if someone dumped a 100-page questionnaire on your desk?” asked another Frankfurt asset manager.
Watson Wyatt, which has pledged full co-operation on the BVI’s questionnaire, admits that consultants
can make things extremely difficult for managers. “I fully understand asset managers when they ask for transparency from consultants,” says Zeljko Tipuric, senior consultant at Watson Wyatt’s Frankfurt office. “This is particularly true of those who, as part of a search conducted by a consultant, fill out the same RFP five times and then get different reasons for why they were rejected.”
Consequently, some industry watchers feel that instead of wasting time on getting more transparency from the consultants, the BVI should focus on getting them to harmonise information requirements for beauty contests. “This has happened in Australia, so the BVI should be encouraged by that example,” says a Frankfurt-based expert on Germany’s institutional market. But consultants in Germany reject the idea.
“Each consultant should have the ability to define how the search is best conducted, as that is the added value that the consultants provides to the investor,” says Tipuric. “And each asset manager is different. We can’t, for example, expect that all use a quantitative approach to portfolio management.”
In fairness to German asset managers, it should be stressed that not all complain about consultants.
Alexander Schindler, board executive at Union Investment responsible for institutional business believes that instead of grumbling about how winning mandates has grown tougher due to consultants, asset managers should adapt to the new situation.
“Whoever provides quality should not be reluctant to compete. In fact, by participating in searches conducted by consultants, we at Union Investment gain access to investors who otherwise would not know us,” says Schindler.
In 2005, Union formed a five-member team to deal specifically with consultants and their searches. The payoff came year later when it was able to generate 12% of its new institutional business via consultant-led searches.
Schindler also observes that while consultants are becoming more important for German institutional allocations, asset managers should remember that there are limits to their growth. “Even among big investors who can afford consultants, many have in past years acquired the competence and the resources to do their own asset allocation and asset manager searches,” he says. “Beyond that, there are many investors in Germany who are not willing to pay for consulting costs.” The consultants themselves admit that while their business is vibrant, it is unlikely that they will ever dominate institutional allocations due to an entrenched ‘do-it-yourself’ mentality among investors. A telling sign is that many of the asset managers represented by the BVI have or are in the process of building significant sales teams dedicated to acquiring and retaining German institutional investors.