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Consultants on the block

Consultants are getting a taste of their own medicine, in the form of a manager selection performance measurement scheme launched by the WM Company, the UK-based performance measurement and investment administration firm.
But some consultants have chosen to put themselves in the spotlight, says Peter Warrington, executive director at WM, who suggests two main reasons for this.
“First of all, they (consultants) want to demonstrate added value to their services, in order to justify increasing their fees, and second, they are now eager to undertake internal management control.” He says that, by being measured, consultants could prove to their prospective and existing customers the high level of performance they achieve and could therefore charge more. At the same time, internal measurement could demonstrate the level of added value team members were bringing to their respective consultancy firm. “Consultants are saying they are spending a lot of time and money monitoring investment managers but why not start monitoring in-house as well ?”
But it isn’t always smooth sailing, as Warrington points out that reactions to the scheme vary across the industry. “Fund managers themselves are generally neutral. The funds per se are very enthusiastic whilst the reaction of consultants themselves is something of a mixed bag.”
He says that there continues to be resistance from consultants, since many still object to being measured. “I suppose fund managers didn’t want to be measured 20 years ago. The consultants can see it coming but they’re not doing anything to speed it up or encourage it.”
Though managers themselves don’t get too involved, they are nonetheless keen to see if they are on the consultants’ ‘buy’ list, the list of recommended choices, for obvious reasons.
But pension funds are keen to see consultants rated so they can be sure that their money is well spent and to ensure consistency in their manager selection.
The number of potential pension funds with over £1bn (€1.7bn) under management which could potentially commission the WM company to measure their consultants numbers around 130. Warrington refers to these as the “billionaire’s club”.
The measurement process itself is an ongoing review taken quarterly and looks at consultants’ manager selection based purely on how they perform against a given benchmark, which could be in the form of an index, peer group, or simply whatever the WM company and the consultancy firm agree.
The format is short and direct. WM simply ask consultants who they recommend or advise against for a given asset class. This could involve any number of managers. These recommendations, called buy and sell, are based on the managers’ performance against the relevant benchmark . The consultants pass this information to WM before the start of the quarter and then WM do nothing more than monitor the managers’ performance to check how well it matches the consultants’ advice. They then take a percentage average of what the client would have made if they’d taken the consultants advice and thus they have an idea of how well the consultant himself is performing.
The quarterly measurements are chainlinked to provide a yearly and longer term view.
One of the surprising results that the WM company observed was how very few changes consultants recommend to their clients in terms of manager selection. “We set the scheme up initially as a quarterly exercise, expecting to have to modify that to a monthly view, but this hasn’t been the case. This was a big, and certainly pleasant, surprise, since we expected to see a lot more chopping and changing.”
Warrington says that it isn’t uncommon to see just one manager in and one out in a given year.
He believes that it isn’t a question of being conservative or faithful, but merely that consultants take a longer term view than originally anticipated. “Most actually tend to leave the manager list as it is,” he says. Factors such as management firms being taken over, managers leaving a certain firm en masse or consultants losing faith in the way some firms practice are some of the reason changes are recommended.
The scheme is only operating at present in the UK, but there is no reason why it can’t grow internationally. “We are already measuring pension funds in 32 countries, so there’s no reason why we can’t extend our activities to include their advisers. Basically we’ll need to target more or less the same 10 consultancy firms abroad as we have here,” says Warrington, who believes that it could all still be run from the UK since gathering the information is pretty easy. “The main thing is agreeing the principles involved, and the principles we apply here will be the same anywhere in the world.”
He is aware, however, of the level of hostility that could be encountered if they decide to push into continental Europe. “I’m sure there are small consultancy firms in countries like France and Germany that won’t want to be measured.”
The future will bring a natural extension of the measurement process to include consultants’ work on asset allocation strategies, suggests Warrington. “This is the way the market is moving, particularly in the UK, where consultants are getting more and more involved in investment decision taking.” He believes that new tailor-made benchmarks are entering the market and the fundamental question whether these are right for a given type of investment is now being asked. “This is definitely changing the scope and focus of the measurement process.”

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