Seeking a consultancy model for Europe
One thing seems to be clear from our annual round-up of Europe’s pensions consultancy industry – the US model has not made it very far across the Atlantic, particularly when it comes to asset consulting. It appears to have got as far as the Irish and UK frontiers.
On the continent, they are being a bit, well, European, with fragments of the model taking root in soil that is often infertile, if not hostile to the concept. But within continental Europe, pension fund advisory services are being provided in an increasingly wide variety of forms.
Like other US exports, such as global custody, the multinationals were the US consultants’ natural clients. They were often the reason for establishing local offices, which were supposed to be the springboard into the local market via a trickle down process.
The taking over of local actuarial and other consultancies and brokerages was a natural part of the process of bedding in it seemed.
In some areas it has been very successful, as the merger between Watson Wyatt and Brans in the Netherlands seems to be, some 18 months out.
The disappearance of Bacon & Woodrow - the UK’s last remaining major player - to the maw of Hewitt to create another international giant, means the top end of the business is now firmly in the domination of Anglo-American groups, with perhaps the emphasis on the ‘American’.
On the continent, however, things have not quite gone to plan for the invading titans.
Such mergers have meant a redrawing of the lines as to where the large consultants believe they can exploit business potential.
Bacon & Woodrow’s post merger withdrawal from the Woodrow Milliman network of pensions benefit consultants underscores the point. A number of the network participants were leading independent firms in their national markets, who are now regrouping under the Milliman umbrella.
While the Bacon & Woodrow will continue to work with network members where it is in clients’ interests, it is grappling with how it may set about covering Europe going forward.
Takeovers have not proved to be the easy strategy they were assumed to be by the big players - reflecting a continuing independent streak in the European pensions consultancy industry. Parachuting into markets has claimed its victims.
On the investment consulting side the logistics of the business are imposing their discipline, with moves to centralise operations and run them from somewhere like London becoming more commonplace Mercers’ withdrawal of its investment practice from Sweden being a case in point. There are cogent reasons why asset consulting is being centralised. The major groups have had to make sure that this activity, which is heavily resource intensive, is being run cost effectively. This meant putting activities in one place as far as was wholly practicable. Even in the US, the trend among advisers has been to centralise their manager research and related activities. This is in sharp contrast to actuarial services, which have to have local delivery and are highly market specific.
Nevertheless, the pensions consulting reality of the European markets does not always conform to convenience.
Wilshire Associates, for one, had such high hopes when it hit the Dutch market some years ago and commenced offering its asset consulting services to one of the biggest mountain of assets in continental Europe. Now, investment consultancy is usually only provided to new clients who have come to the company for its private equity and absolute return strategies.
Indeed, the departure of Wilshire director Lou ten Cate to form the Amsterdam-based Investment Management Factory (IMF) represented, in part, the schism in markets such as Holland, whereby many of the small and medium sized pension funds cherry-pick services they require from a competing throng of smaller advisors, while the bulk of large funds have the capacity to do the work in-house.
The effect of being hired for on a one-off assignment basis on the asset consulting side makes it extremely difficult to run the business.
Some large funds are looking for more external advice from international consultancy firms as products become more complex and international, but it is a trickle for the moment rather than a flood.
Like other groups, Wilshire wants to bring its US manager of managers product to Europe eventually. Here it will be joining SEI, another US consultancy that decided only to venture into Europe on its multi-manager platform, and Frank Russell which is successfully building up its asset management arm, while still offering its traditional consultancy work.
It is an appealing model and other consulting outfits have followed suit – the latest example being UK consulting actuaries and pension administrators Punter Southall, which merged its financial management arm PSFM with South Africa’s Gensec International Asset Management at the end of last year in a bid to enter the multi-manager market. It also perhaps signals a greater interest in consulting by asset managers, which is also reflected in the greater numbers of hirings of consultants to act as client and consultant relationship managers. Does this presage a counter move eventually by managers into a greater degree of consultancy with their existing services?
The move into asset management, with its high potential for conflicts of interest, takes consultants away from the brink of the hand to mouth existence they have had to live, particularly in Europe, where the retainer approach to having consultants is no way as established as in the US and the UK. Having a pile of assets under management yielding a regular and continuing income in the form of an asset management fee must be a great source of comfort to consultancy finance directors and to ageing consultants alike.
Time will tell though whether consultancy activities will survive within the organisations that are embracing the asset management philosophy. In a decade or so, the consultancy roots may be a fond memory of more innocent bygone days within asset management power-houses.
So what is the story about consultancy demand?
Research among European pension funds by Fulcrum found that just over half used consultants and other surveys, such as that on European asset management undertaken by Greenwich Associates have found that institutional investors are interested in using consultants services. The Greenwich figures (see table) show some markets with very positive leanings towards consultants, but the situation does vary very much from market to market. This is in strong contrast to the US scene, where our report shows that according to Greenwich, the demand is growing (see page 9).
What we are seeing in certain markets is an upswing in the activities of locally spawned consultancies, with specialists in investment setting up as advisers to pension funds.
So in a market like Sweden, a firm like Wassum has had a tremendous impact and carved out a major business order book, both domestically and further afield.
The company is taking its message to the other Nordic countries, opening offices in Norway and Finland and going European market by market.
Nevertheless, Europe is still greatly served by small consultancy operations – home grown, respected and familiar with the idiosyncracies of the domestic scene.
Names that spring to mind in Scandinavia include Sweden’s Sverker Lindström of Lindström & Partners, MPIR in Stockholm and Norway’s Pensjons & Finans.
Just over the water consultants such as Alcifor in Denmark and Pragma in Belgium have aimed to serve a cross border clientele as part of their European strategy, as have a number of Belgian and Swiss firms. Other players with influence in these markets include long established actuarial practices, which have seen the need to graft on asset advice to their range of services.
Furthermore, in many countries the presence of advisory firms linked to financial groups, such as banks or insurance companies is tangible.
They see the need for advice among their clientele, but in many unregulated markets, the ever-present temptation is to be an outlet for group products, rather than be purveyors of independent consultancy.
The Swiss and the German markets have seen an upsurge in consultancy activity with new investment advisers seemingly able to reach those parts of the market eluding the grasp of the established international firms. Whether advisory firms with local origins have an automatic advantage purely for tribal reasons though seems doubtful – considering how hard-nosed pension funds and other investors can be when spending their euros on advice.
The answer could be a combination of cost factors alongside local knowledge.
There are threats, however, to the future progress of consultants as a whole.
One comes from a surprising quarter perhaps…that of pension funds themselves.
In countries such as the Netherlands and Switzerland schemes see a market opening to provide all the services that their fellow pension funds need - including pensions advice.
And on the multinationals side, a number of European-based groups are just not playing the game the Anglo-Saxon way.
German giant Siemens, for example, has its own pensions advisory team performing the duties of an in-house consultant for the group’s corporate finance departments and pension plans, but also supporting a selected number of other big multinational corporations in all key areas of pension finance management. Other multinationals have been building and operating similar structures.
The development of the pensions advisory marketin Europe, particularly in investment consulting, may well be determined by the outcome of the struggle between the top down approach of the large international players and the bottom up drive into markets by the indigenous players.