Investment consultant Frank Russell has “influence” currently over 10% of the world’s pensions assets, according to the company’s chief executive officer Mike Phillips. But in five years’ time this will not be the case.
“Investment consulting is our flagship business, but it is not our core business any longer.” The business generating most of the pro-fits is the investment management operation and this is the future direction of the company, he says. It is scheduled to grow from $30bn of assets to $100bn in five years. He adds: “While we would like to be consultants to 10% of the world’s pensions assets then, that is not where we see the revenue and the profit growth.” As a private company, Russell is guarded about its figures, but its sales come to about $300m annually, with 25% outside the US. “Just over half these sales are generated by in-vestment management, but a larg-er proportion of profits comes from this. Of the businesses we run in-vestment management is the most profitable.”
He sees the share of consulting business declining in the future, mainly as it is not being positioned for rapid expansion.
Other areas, such as performance measurement and analytics are likely to be more of growth area than consultancy. “But we do not see such items to be high sticker price items.” One problem is that in the US, Russell has already a high share of these markets, whereas in investment management the proportion is minuscule.
“We have here a new proposition that has the potential to take market share from our competitors in large amounts.” This new deal is the multi-asset, multi-style, multi-manager approach. “We think we have invented a better investment mousetrap. In 1980 when we set it up, it was seen as rather marginal and new fangled. Now we see this approach becoming a core investment proposition. Everyone is talking about managing managers - total fund outsourcing - new paradigm managers - strategic partnerships.”
What all this boils down to in Phil-lips’ eyes is that: “You do not use just a couple of managers, you use multiple managers and you need someone to differentiate them”.
To reach the $100bn sales, Russells’ strategy is global distribution for its multi-manager funds. For fund sales in the $50,000 to $10m range it uses distribution partners. “It will vary from marketplace to marketplace, but we do not sell directly into any market.”
But it does sell direct to institutions under the other leg of its strategy. “Pension funds use us as the implementation mechanism for their strategy, by putting most if not all of their pension fund assets in our stewardship.” If the fund was below $1bn, the best way normally to implement the strategy would be through the pooled fund structur-es, he says. Eithe r way, all the management is outsourced. Already some $11bn is invested for 80 clients in this way. But Russells’ aim is to have clients up with an average in the $500m to $1bn range. “That’s not a pipedream,” he says. The strategy now is to ex-tend what has been happening in the US to Europe and elsewhere.
He thinks the market is going this way for a number of reasons, but particularly because of the fiduciary question that is beginning to loom. The trend to defined contribution only heightens the issue. “The fiduciary question means em-ployers have a duty to pick managers that deliver and to educate their workforce.” Employees cannot be left to swing in the breeze, he warns.
He meets the challenge of conflicts the change from consultancy to investment management brings head-on. “If we switch from a consultancy role to a fiduciary stewardship role, what happens is that our fees go up and our fiduciary obligations go up. There is nothing self-serving here, we get paid more for more risk.”
The major consultancies that Rus-sell has are not by and large clients for investment management. But should such a client become a money management client, the consultancy role is resigned from; nor do consultants get paid fees for bringing in investment clients.
Financial services are redolent with conflicts, Phillips maintains. He asks why if there is a conflict is it assumed that the consultant has succumbed to it rather than dealt with it? “Why can investment banks have conflicts and deal with them, but shiny pants consultants can’t?” Fennell Betson