Rachel Fixsen charts the emergence of niche consultants
and advisers in the pensions advice market
The phrase “small is beautiful” is a platitude more about consolation than appreciation. And for those in business, most would far rather bask in the glory of size than be considered exquisite.
But in the muddy waters of today’s pensions consultancy marketplace, small can have its advantages: for potential clients, limited size or service offering can be a sign of the expertise, transparency and impartiality they demand.
With 50 staff worldwide, consultancy Bfinance is far from being small, but it does specialise in just one area - selection of investment managers. In the UK, the firm’s director of business development Michael Hart says he certainly sees a real demand for independent consultants who specialise in certain aspects of pension fund advice. “Especially in the local authority market, which is really changing,” he says.
The problem for many local authority pension funds that need to conduct manager selection exercises, is that the large pensions consultancies work on a buy-list basis, where they only include a limited range of investment managers. “They all tend to have the same names and they have a fairly generic, one-size-fits-all approach,” he says.
Bfinance only comes in to help the pension fund client once the strategy has been set, and the pension fund is clear on which asset class it is seeking external management for. “We’re called in, and we tailor our search to the specific requirements of the individual pension funds, so it’s very much a bespoke approach,” he says.
In Germany, Alpha Portfolio Advisors is a completely independent partnership, says managing director Jochen Kleeberg. “The problem if you have a parent company is that you may perhaps have other interests to serve,” he says. “We are very well placed to meet client needs, because we specialise in just two key areas - manager selection and asset allocation,” he continues. “We have a strong culture which is focused on generating alpha.
Kleeberg believes it is important that a consultancy is nimble, and able to direct pension clients to any investment managers that are appropriate at the time for a particular mandate. The products that are recommended across the board by the global consultancies are often too large to outperform, he suggests.
“The managers that are widely seen as good take in a lot of money; but when they reach a huge volume that can be damaging for future outperformance.” “We don’t go out in advance to visit asset managers, but rather do this when we have a search to do,” he says.
The firm has its own extensive database of managers’ details, which it uses as the ideas pool. Once the long list is drawn up, it undertakes qualitative due diligence, looking at many areas of the business including research, portfolio and transaction management. Independence is certainly valued highly by institutional investors, he says. “It is a fundamental condition that a consultant can give clean advice,” he insists.
In any case, Alpha Portfolio Advisors has no intention of changing the way it works. “We are convinced the way we do business is right; we have a lot of business and the firm has developed incredibly well over the last 10 years,” says Kleeberg.
Michael Russell is a partner and head of Europe at Altius Associates, a firm specialising in advising on private equity investment. Alongside the advice it gives, the consultancy does offer some investment products, though this is really to help smaller scale investors by providing an aggregating product. However, Altius’ main focus has been on larger clients.
The broader-based, larger consultancies have a big part to play for pension funds, he points out. “They are relied upon for general portfolio structuring,” says Russell. “They do have specialist capabilities, but they are general consultants for the whole of the portfolio. We specialise in a particular slice.”
Russell believes some of the smaller, specialist consultancy firms may eventually broaden their business to offer a wider range of consultancy services to pension funds, and some have already gone down that route. But this is not part of Altius’ plan.
“In our case, we’ve taken a specific decision to remain focussed on this area; it’s clearly good for us and good for the client. We like to see that it works well for all. This is a specialised market, and pension funds are looking for specialised solutions.
Jewson Associates was established 12 years ago and its clients are mainly family offices and private clients along with a small number of pension funds. One of the areas it sees a lot of interest in at the moment is investment manager review. “There certainly is a role for the independent investment consultant,” insists Jewson’s CEO, Edward Jewson. “There is the impartiality we can bring which perhaps others find it hard to demonstrate, because we’re not selling any products.”
“Sometimes I wonder how easy it is for the big firms to separate the two arms,” Jewson remarks.
“A few years ago, we advised our clients to come out of property,” he says. If the firm had had a tie to a product such as a property fund, Jewson conjectures that it might have been a more difficult call to make.
The independent consultancy Gazelle offers strategic financial advice to pension fund trustees alongside its corporate finance consulting. “In terms of advisers, there’s a move for trustees to get independent actuarial advice and separate legal advice, particularly where there’s a takeover or issues arising on scheme-specific funding,” says Director Donald Fleming.
“That’s where the independent financial consultant comes in; the company will likely have its own investment bank advising on the pension scheme, and it puts the trustees on a level playing field with the company,” he says.
“I think independence and not having any particular ties to any large organisation means you can give advice without any worries about where that might lead - there’s no cross selling,” he continues. Fleming also doubts whether firms with sales interests can be sure of maintaining an objective viewpoint for pension clients. “I’m not always sure there is independence there,” he says. “If push comes to shove, they have to ask themselves, do we stand on the trustees’ side, or the company’s side?”
Gazelle started out ten years ago as a boutique M&A firm, advising on corporate strategy and corporate disposals, Fleming explains. “We built on this investment banking heritage with a blend of credit and pensions consulting expertise which makes our approach quite distinctive.”
The firm approaches problems a pension fund might face on this integrated basis, an angle that Fleming argues is particularly relevant for pension funds today.
“As a major stakeholder in the company, the scheme needs not only to understand pension-fund specific issues, but also to have an understanding of the other risk and capital management pressures the sponsor is under,” he says.
“So it struck us that there was a need for some independent, dispassionate advice from a third party to look at the company covenant and provide advice,” says Fleming. Advice is useful, but then the advice needs to be applied, he points out. And this part of it involves cooperation with a number of parties. “The advantage of us not having an axe to grind, is that we’ve worked very well side-by-side with the actuaries and consultants in trying to piece this jigsaw together,” he says.
Beefing up on the actuarial side
In the evolving pensions consultancy marketplace, it is not only smaller players picking up new work. Big accountancy firms PwC and KPMG have both been growing their pensions business.
Last summer, KPMG said it was expanding its corporate pensions practice in the UK, signing up three new partners from traditional actuarial pensions advisory firms.
PwC has been adding staff too. “Client demand has fuelled our growth and, in the last three years, our pensions practice has doubled in size,” according to Raj Mody, partner in PwC’s pensions practice, and formerly of Hewitt. “We have therefore been assertively recruiting, and we’ve developed this capability that we’ve seen huge demand for,”
PwC has actuaries and consultants who advise in the insurance industry, and this has been useful in advising pension buyouts, where many of the new providers operate as life insurance-regulated entities, says Mody.
It is PwC’s experience of the corporate side that gives it authority to find answers for pension fund clients, Mody argues. “If we’re advising trustees, we know first hand the issues from the sponsor’s point of view; we can bring a number of angles to bear to bring a successful outcome,” he says.