A glance at the IPE European Consultants’ Survey tables will show that pension funds have a wide range of choice of adviser than ever before.
Some advisory firms have just one practitioner; others offer the combined talents of several thousand. In fact, the resources of either a Mercer or Hewitt outnumber all the independent specialists in the survey put together.
But it would be facile to say that the array of skills a multinational adviser carries within its ranks are always more attractive to potential clients.
A number of boutiques have established themselves and prospered: bfinance in London, Kottmann Advisory in Zurich and AIC in Amsterdam to name but three.
Likewise, does a specialist like Rotterdam-based Ortec fear competition? It specialises in risk management and thus does not have the attendant dangers of human resource and investment adviser conglomerates.
The collapse of Arthur Andersen as a brand after its tainted association with Enron is proof that the bigger they come, the harder they fall.
Size brings vulnerability as well as strength. Global brands appear brittle when under attack: one direct hit sends fractures out across the entire surface.
In the US consultancies now have to defend themselves from the accusation of “pay-to-play”, where asset managers pay to attend the same conference , organised by the consultancy firm,at the same table as prospective clients.
The smaller firms are subject to different constraints. But even here the formats can change.
The Netherlands’ Pension Factory last year experienced the withdrawal of its external investor, Swiss Re and the departure of key staff including Arun Ratra and Fred Nieuwland. In came Erik van Dijk, previously at Fortis then Palladyne, who has worked on a new form of optimisation with Professor Harry Markowitz. Together with Lou ten Cate, the renewed business started offering asset allocation and multi-manager investment solutions as well as the extant pensions management advice.
Rebranded Compendeon, with Achmea on board as a key client, seems to be faring well. Could a multinational organisation
cope with the same degree of
Likewise FundPartners, which lost some of its hedge-fund expertise when Jurcell Virginia left to start up AIC. Founder Jeroen Tielman and other staff have sold their holdings in FundPartners entirely to NIB Capital, and parked themselves inside the bank.
Tielman is proud that his team has a position of trust still for Dutch institutional clients but the FundPartners’ model of product engineering in the open market has, like the name itself, been lost.
FundPartners is now four people. Compendeon is 10. The breadth of reputational risk is not wide. So even though the upheavals have been considerable, there are just a handful of employees and key clients to communicate with. Unlike the speculation which has spread unfairly over the Marsh empire, for example, following distinct financial prosecutions and heavy fines.
Boutiques only require a few clients to make a living. If a handful of consultants are servicing a handful of clients, personal relationships will be strong and often adaptable.
Larger consultancies, on the
other hand, are susceptible to criticism that come with being larger organisations.
One sales representative of a major UK fund manager, who asked not to be named, complains she has to educate junior advisers: “The people the_consultants they send are in their 20s. They are supposed to be interrogating me and I end up explaining to them the basics of asset management.”
Elsewhere, institutional investors have questioned larger consultancies’ enthusiasm when drawing up lists of managers for beauty parades, even though these advisers possess the most extensive databases. Some have not been given the service or reasoning behind list selections they expected.
So when it comes to size, having a ten-thousand-strong workforce dotted around the globe is not a convincing criterion. Prospective clients for human resources or investments are probably better off dividing number of staff by the number of clients. This kind of relative approach is more likely to give a truer picture of the provider’s capabilities. Economies of scale work only up to a point.
If proof were needed, consider the number of eponymous advisory firms in existence. Benefits or investment consulting is a combination of information systems and heroic interpretation.
Keith Ambachtsheer has probably not been called a hero many times in his life before but people believe in his advice and if KPA Advisory dissolved, short of a scandal, his stature would be undiminished.
As long as the heroes can afford the information systems, they do not need an attendant army of foot soldiers to offer a good service.
Support for this theory comes from the investment arm of a wealthy Chicago bank, which across all its businesses employs thousands.
Tony Earnshaw is managing director of Northern Trust’s manager-of-investment-manager business in Europe. He reckons an outfit can operate with fewer than 20 professionals if the researchers are able to focus on the research and not on the peripherals which tend to come with consultancy. The estimate is especially true in Europe where the matrix of styles and sizes established in US investing are absent.
Globally, NTGI has 20 full-time professional researchers. Four of those are based in London, headed by John Greene. Earnshaw emphasises that they are all seniors. “We do not employ juniors,” he says.
But how does a successful organisation manage growth without forming a vanguard in which the heroes are first to be seen by prospective clients but then juniors take over the daily servicing?
One solution is to keep growth realistic. Few boutiques expect to dominate the world.
“I can see us growing to maybe four or five people but not 50. We work as instructed by clients so we are not wasting time,” says Jurcell Virginia at hedge fund advisory specialist, AIC.
Given this reasonableness, acquisitive large consultancies must decide whether they compete, acquire or steer clear altogether.
Competition is perhaps hardest to measure. For over a decade, expansion across continental Europe has been predicated on its constituent countries funding their retirement liabilities. The general view has been that a consultant is not needed when there are sizeable assets involved. Countries like France, Germany and Italy have been slow to fall in line with the projections of foreign consultants and money managers. In other words, there has not been that much business to compete for.
France, for example, has been wary of embracing funded, occupation-related pension schemes. It does not want to break the ethos of intergenerational solidarity which is preserved by workers’ taxes paying their parents’ pension. Nor does it want to expand stock market capitalism, as opposed to banking capitalism, whereby leading French businesses would be more exposed to foreign mergers and acquisitions.
Change is coming, however, and the establishment of national funds to cover future state pensions is the clearest signal. Ireland, Norway, France and Sweden have all introduced such funds. They collectively have assets worth over €200bn, and it is of note that Mercer Investment Consulting has been employed in all four locations. Apart from anything else, this is excellent flag-planting.
In Paris, the Mercer team has now picked up a mandate to advise Arrco and Agirc, the national supplementary occupational pension regimes, on investing their surplus.
Hewitt has been among the most acquisitive of consultancies. In Paris the Finance Arbitrage name remains for now but Prasa in Switzerland and Bacon & Woodrow in the UK have been absorbed into the single brand. The latest joint venture is Hewitt Bode, an alliance in Germany with Bode Grabner Beye, which was allied with Watson Wyatt until it decided to go it alone in the German market, poaching Bode Grabner Beye staff along the way.
Steering clear of regions or lines of business is certainly a theme for 2005 and beyond. Just as every business sector bar private equity has shunned the conglomerate model, and money managers prefer to talk about specialist rather than balanced investing, so consultancies are more candid these days about what they avoid.
One interesting model is that of Towers Perrin. It has a clear wish to work with the headquarters of multinational companies, acting as a preferred adviser on human resources. This entails understanding of employee benefits and relevant legislation at national level, but not necessarily the business there.
“Global consulting but not necessarily one firm globally,” says Nigel Bateman, head of Towers Perrin’s European consulting arm. This means it would be happy to outsource to other consultancies the ongoing, daily servicing of its multinational clients’ subsidiaries.
Towers’ division of the world demonstrates this philosophy. It sees three tiers which contain all countries. The first tier comprises the G7 countries plus Brazil. The rest of western Europe and central Europe finds itself in tier two.
Towers does not have staff on the ground in every country in tier two; it may have just a “watching brief”, according to Bateman.
What the consultancy offers then is not a full international service but a joined-up one. Bateman gives the example of accounting for actuarial gains and losses in pension schemes. Factors such as inflation will be assumed at the national level for each scheme, or perhaps by region which makes business but not economic sense – for example, northern Europe, which includes both Eurozone and non-Euro-zone countries. If there is no global co-ordination of assumptions, headquarters might face a nasty surprise when numbers diverge. Towers has teams taking in data feeds from financial markets, central banks and regulators which enable it to offer central clients pertinent advice on inflation and other assumptions.
Bateman draws a virtuous circle beginning with four quadrants of benefit design, proceeding to means of funding, then investment advice and finally auditing.
Towers is certainly not focused on the fourth quadrant, but neither is it interested in populating the third quadrant of investing advice in the customary fashion. It has no manager database in the UK, for example.
Mark Duke, practice head, is thus concentrating on advice at the strategic level.
At Towers Perrin in Amsterdam, head of the investment practice, Fred Nieuwland looks at strategic investing thus: “The ambition of the pension fund drives the allocation.” He is prepared to get down to manager selection even in alternatives like hedge funds, but everything stems from the attitude of scheme and sponsor: “A stronger sponsor enables us to be more flexibility in coming up with design.”
Given the company earned about $560m for the last reported year in fees from benefits consulting excluding pensions administration, its model seems to be working well.
If a client wants advice on investment managers, Towers recommends Russell’s manager-of-manager service. Novaster, one of the largest independent pensions consultancies in Spain, does the same.
All seem to benefit from this
new kind of specialisation. So should Russell remain in a survey
of consultants when it is being
recommended de facto as an asset manager?
Russell currently has approximately 20 institutional investor clients for consulting in Europe. Jon Baillie, managing director of institutional investment services for the EMEA region, denies that number will necessarily wither because of the company’s focus on being a manager of asset managers.
He vows he would be happy to see that number stay the same or even rise to 30. “But it depends on the markets.” He explains that speaking to clients as a consultant gives Russell a feel for what investors’ needs and concerns are.
Larger pension funds do ask asset managers for advice and so it is a valid point. Russell’s consultancy clients tend to be well-governed, sophisticated investors. Being a small number, however, they account for no more than 10% of European revenues. The lion’s share comes from the 200 or so clients of its manager-of-managers service.
The following example might explain the lure of managing asset managers. For a €100m international equity mandate, a general fee estimate would be 70 basis points (0.7%), or e700,000.
Imagine there are three managers selected for diversification purposes.
An investment consultancy would be hard-pressed to earn more than €150,000 from three international equity searches; half that sum would be closer to the average, especially given that they were in the same asset class.
The manager-of-manager fee is annual; the mandate search is a one-off.
Given these differences, Russell’s push into managing rather than advising seems like a no-brainer. Earnshaw’s view that not more than 20 researchers are required for a European centre also makes this route attractive.
At Compendeon in Apeldoorn, van Dijk has brought a database of 5,000 asset manager names and with a team of less than 10, he will offer multi-manager solutions covering 18 different types of mandate, divided by asset class or region.
Multi-manager has attracted the consultancies. Major US group SEI closed down its advisory operation to concentrate on managing assets. While the economics of scale the garnering of assets can be a slow process.
Managers of managers must be compared with asset managers and £1bn is not a comfortable sum in this sector unless your business is alternatives. Aon Consulting’s manager-of-manager service, run by Adrian Swales, still relies on internal Aon clients for a lot of the assets under management.
PSolve currently has about £400m in assets under management from clients, according to John Conroy, a principal and formerly of Towers Perrin. He reckons PSolve can reach £1bn this year. There will be no exit, however, from the advisory market which still makes just over half PSolve’s revenues, according to Conroy.
He believes that the strength is being able to provide defined
benefit clients with a genuine link
between needs and implementation. This does not mean PSolve
has to be contracted to manage asset managers but it gives clients more choice than mere recommendations. PSolve’s holistic service seems to be on the same lines as Compendeon’s.
Another consultancy that has
certainly flourished in the new era of specialisation has been bfinance, which is currently involved in about half of all investment manager searches by local authorities in the UK.
bfinance has also worked across Europe for the fund of Portugal Telecom, BankPension in Denmark, Sainsbury’s and unnamed Swiss and Swedish institutional investors.
Like IPE’s related service, IPE-Quest, bfinance has profited from many clients’ feeling that full-service consultancies are not always thorough when supplying long lists. Moreover, the bfinance business model, where a fee is taken from the successful asset manager, rather like a recruitment consultant, has been welcome by many customers because it means they pay nothing directly.
As Keith Faulkner, a former worldwide partner at Mercer, launches a service offering to analyse consultancies’ added-value, it is evident that specialisation in the industry is set to continue. Small players will continue to find niches which the giants overlook or simply cannot occupy.