Quest for the big breakthrough
The heat is on for international consultants trying to find a viable way into Europe's markets, writes Rachel Oliver.
The investment consultants have a lot on their minds at the moment. Namely, how to support a fledgling business in continental Europe on their less than impressive margins and how to retain market share, when there doesn't seem much to go round in the first place.
Eighty per cent of the people in Europe who are employed in actuarial, investment consultancy and re-lated services are employed in our in-dustry i n the UK and a lot of the time 80% of the turnover plus is in the UK. And 20% of the people and 20% of the revenue is outside the UK," points out Philip Robinson at Watson Wyatt. Many of those offices in that 20% earnings category, it appears, have been losing money for some time. And consultants such as Watson Wyatt in many countries are in a situation where they are simply waiting for the market to happen with little fiscal benefit in the meantime. "We think it is going to grow, we hope it is going to grow, and we have got to be there," stresses Robinson, "But in many European countries, the opportunities are limited by the size of the occupational markets and lack of funding." Without offering the full investment consultancy function, simply providing services such as tax advice on the continent does not pay the kind of fees needed to support the business. "Can you build up enough physical mass in the country which is paid for by the income generated there? No," adds Brian Hill at Watson Wyatt in the UK. "And you have all of the consultants in this continuous battle between how long do we invest in the country, put people there, know we are going to lose money waiting for the developments of the market? We have all been down that road. And it's been a constant disappointment for all of us." This bleak news has not deterred the merger and co-operation activity which continues to dominate the consultants industry, though it has seemed to slow down over the past year. The year opened with the tie up of Bacon & Woodrow and San Francisco-based consultants Callan in a joint venture and closed with the key event of the year of William M Mercer's parent company, Marsh & McClennan buying out the Sedgwick Group for £1.25bn (E1.78bn). Pre finalisation of the SNL tie up, Mercer had already combined its operations with Corporate Resources Group (CRG), a global firm providing compensation and human re-sources consulting, information, and management development services to multinationals. The venture gives Mercer further exposure in Europe, including a presence in Dusseldorf, Helsinki, Munich and Prague. Last year was also a busy one for Russell.
One of the major developments in the firm's business philosophy was the joint venture agreement with Société Générale Asset Management to introduce the multi-manager funds concept to European investors across the continent.
Two partnerships followed in Switzerland with Mellon and its subsidiary Buck Consultants. Watson Wyatt , meanwhile, merged its Italian operation with that of Milan-based human resources consultants ISSO, and added to its Dutch operation with more appointments.
The accountancy firms themselves have also been making noises in the pension fund consulting field. KPMG, Ernst & Young, PricewaterhouseCoopers and Arthur Andersen have all moved into the actuarial and investment consultancy fields in Europe, albeit not extensively, though they have the financial backing behind them to fund further expansion and existing client bases from which to work. "The accounting firms are a potential threat," admits Vivien Carnt of William M Mercer's investment consultany practice in London. "When you really come to make a qualified decision about a consultant you are hiring a firm that has depth of re-sources, good people with a lot of ex-perience and all the factors that make the advice really worth having. And we know how difficult it is to hire people." Yet she is optimistic that new players in the consultancy market will be beneficial to growth as a whole. "It all helps the business grow and familiarity grow and it will inevitably mean that there are clients to whom we never get access because of that relationship, but it also means there will be clients who are looking for a change at some point."
As the consultants and accounting firms continue to expand, they will of course suck up the smaller players into a larger mainframe along the way, though it would be too simplistic tosuggest that this merger activity will mean the death of the local consultant. "Nobody would suggest that the mergers between the Big Six accountancy firms destroyed the market for the small two-man businesses," points out Ken Ayers at Frank Russell in London. "There is plenty of market there as there is plenty of local business for them. A lot of clients want to use an accountant which they know and understand where they get personal attention. " However, whether sourced from a need to fund their existence, or simply as a signal of how different the investment consulting culture is on the continent, the smaller players have been accumulating additional 'non traditional' sources of revenue. One of the ways of achieving this has been by selling research services to fund managers, an activity gathering momentum in countries such as France, Switzerland, Sweden and the Netherlands, according to Mercer's Carnt. "They will approach a manager and say 'we have clients and we will put you on research lists but you need to pay us to do the research' which on the one hand, objectively is a commercial reality that they need to be funded to spend the time doing it," says Carnt but adds, "I understand from fund managers that we are in contact with that there is actually a much closer relationship between that payment and the ultimate putting forward of that manager."
While the investment consulting industry needs all the exposure it can get in educating the continental market, it begs the question of how successful independent third party advice will be in the short term, if the culture of advisory services is so markedly different.
"The objectivity factor is not the assumption - it is almost the assumption that there is a subjective relationship. They just do not understand where consultants fit. And that will take a very long time to change," she says.
So are the international consultants taking it upon themselves to educate the market? "I think it is very important for us not to be arrogant and to assume that we know best and that pension funds will adopt our methods," warns Anthony Ashton of Callan Bacon & Woodrow, "We are fully aware that in order to have an on-going presence we need a local client base which means we need someone there who is sensitive to the local culture and so we can adapt a service which is provided in the UK and the US to the needs of the local markets."
However, there have been constant blocks to international consultants looking to expand particularly in markets such as Germany and Switzerland which tend to veer towards the local providers with whom they have an established long term relationship. In order to access these markets, the only real way is to buy those domestic players with market share as opposed to spending a significant period of time and resources building up the know how and familiarity with the markets, evidently with no guarantees at the end.
But investment consultancy often does not operate on its own - nor would it be viable if it tried to in many markets. The provision of actuarial services including asset liability management and the provided access to the risk management, pension and other insurance products can be essential. Also new services are ex-pected such as performance measurement and analytics. "If you haven't got your performance measurement capability in Switzerland, for example, or your insurance capability, you probability aren't going to wash your face," admits Robinson at Watson Wyatt. "You have to be an holistic provider - all things to all people."
Frank Russell and Mellon Trust, the parent of Buck Consultants, launched a global performance measurement and portfolio analysis firm, Russell/Mellon Analytical Services at the beginning of this year. Frank Russell's Zurich office also has a set up with Mellon's subsidiary Buck Consultants in Geneva, to provide an investment performance measurement service specifically targeted at Swiss pension funds. Swiss Plan Monitor is produced and distributed by Buck Consultants using Frank Russell systemsand data services. "Buck primarily do actuarial consulting so the overlap with what we do is fairly limited," says John Stannard of Russell in the UK. "And they can help provide beneficiary services to those clients for whom we provide strategic relationships. So between Buck and Russell and Mellon we can provide pretty much anything."
Mellon's custody agreements with ABN AMRO and Den Danske Bank will be of invaluable use for the joint set up to access their custody clients with the new programme. Frank Russell already works on behalf of Citibank and Chase on a similar basis, providing analytical services. "If you think about this idea of building strategic relationships," says Stannard, "where you have got asset allocation strategy planning, manager research implementation, review and analysis and then finally custody, all those four things put together are what most pension funds are looking for and we can provide all of those through Russell and Mellon jointly, through all the products we have."
"Where there are countries where nobody else has got performance measurement, you want to set it up," Watson's Hill concurs.
But this also has its downside, he points out. "Once you have set up your database, it becomes available to your competitors. And you have to ask yourself, how much you are we willing to invest to develop a market on behalf of the industry."
Accessing the insurance market cannot be ignored as the European life insurance market holds more than double the amount of retirement money than occupational scheme assets. "You've got $500-600bn in France and Germany each, whereas in France it is $72bn occupational and in $150-250bn Germany. The tradition and culture is to go in the insurance route," says Watson Wyatt's Hill.
Watson Wyatt are content to wait until the role of the fee-based consultant becomes more accepted. Other international consulting firms may not be prepared to wait. In some countries, Mercer has worked closely with the group's local insurance broking operations. Aon has continued buying its way into brokerage firms in Europe. Aon Risk Services France acquired Société Générale d'Assurances et de Prévoyance (SGAP), at the beginning of last year, whose services includes the employee benefits function. Aon also recently made an offer on another brokerage firm in Italy, Nikols Sedgwick Group. Elsewhere it is continuing to digest the big mergers of the previous year, and one of the important moves was to set up its London investment consultancy with the brief of developing services for its European clients.
Another major cultural hurdle on the continent which manifests itself in this market however, is the method of payment. "Plan sponsors are not used to paying consultants fees," says Hill. "They expect the financial intermediary fee to be paid by commission or by brokerage." For pension plans who are increasingly taking out insurance arrangements, the external adviser, the actuary, will also be an insurance broker and the actuary will have been paid by the commission and then an additional annual insurance commission, Hill explains. This can cause problems.
"If you are being paid on commission by your brokers, then who is your client? Are you working for the insurance company or are you working for the client you are supposed to be advising?" says Robinson adding "A lot of our potential to do business is from the evolution from insured into segregated."
But the most controversial route for the consultants may in fact be the most attractive.
When Russell first entered the European multi manager arena, its peers were quick to condemn. Their attitude has now significantly softened, so much so that Mercer has now found itself in the ball game with the SNL merger and Watson Wyatt is eyeing the progress from the terraces.
Russell is convinced the rest of the consulting industry is currently in a state of denial and will follow its lead over the next five years. "There have been several occasions before where we have come up with innovative approaches which the industry has initially decried and subsequently come round to our way of thinking," says Ayers. "So we don't regard the fact that they criticise us as being particularly relevant." Following the SNL tie in, Andrew Kirton at Mercer admits: "The margin is bigger so of course it is going to be attractive but there has to be a rationale to make it attractive to clients and that certainly is a key one for SNL." Mercer itself in fact offers the manager of manager service to its Australian client base as well.
Watson Wyatt has reached a point where the firm is considering the idea of moving into the market, and there is in fact a split in the partnership on the investment side of the consulting business as to what is appropriate way forward, although the dominant forces in the consultancy is currently resisting such a move. "We at Watson Wyatt discuss this frequently," says Hill. "There would have to be quite a decided change in our philosophy for it to change. Where we are going at the moment it is unlikely that Watson Wyatt will move into the fund of funds area." However, Watsons do run a service known as Structured Alpha, launched in February last year which will be actively marketed this year.
Structured Alpha is run on a performance-related fee basis and allows Watson Wyatt to become 'more involved' in the management of their clients managers; the manager structure, appointments, hiring and firing of those managers. "We will link our fee to the management structure actually achieving what we said it would do," says Hill, "One of the problems the investment consulting industry has to come to terms with is that in the past it has not been measurable." Hill denies that this approach is in fact a manager of managers function, instead referring to it as a method which effectively avoids consultants choosing their 'favourite' managers regardless of their performance. Russell, the instigator, has now moved on. Russell Integrated Asset Management is not an operating company as yet, but a set of products which Russell is using to pull together, what Ayers refers to as the "two extremes" of its business: independent investment consulting and selling clients their own funds. "We are saying 'You need strategic help, you need the sort of advice that used to be called consulting, but you also need this structured way of doing the investing itself, so we are going to combine the two and provide both services in one package.'" Frank Russell is now actively looking to expand its manager of managers function, one of its fastest growing areas of its business, to manage an entire pension fund's portfolio of assets and has already won two major new international clients for this service. "We are completing the circle by almost going into balanced management," says Ayers. "What we can do through Russell Integrated Asset Management is put together different asset classes through our own funds and the result is an integrated whole that includes multiple asset classes as well, so we are one provider, providing all these specialist sectors and managers in agreed proportions based on a consulting type of asset allocation strategy." "