The UK's pension fund investment consultancy market is set to further polarise between a handful of major international firms and a larger number of successful specialist boutiques and middle players, leading figures in the business have told Pension Funds Insider

Olivier Cassin, managing director of consultancy firm bfinance says that "increased specialisation is a dominant trend".

He believes that there is a real sense that the traditional single consultancy model is ending as funds look to employ niche advisers for "highly specific tasks" that they use alongside their main consultants.

Six or so years ago, says Cassin, some pension funds would say that they were not interested in working with an additional consultant as they already had one. "Now," he says, "they are much more open to test new things." 

Tom Geraghty, European head of investment consulting at Mercer says that "we have to deal with increased complexity which brings more demands for specialist advice. It really moved from delivering general to delivering specialist advice."

Representatives at the big three consulting firms of Towers Watson, Aon Hewitt and Mercer claim that recent mergers and increasing market dominance have allowed them to offer better services with improved economies of scale. That has helped them to cement their place at the top of a two-tier consultancy market. 

Boosting specific knowledge in individual investment areas has been a priority for the larger firms. Geraghty says that Mercer has divided its research teams up in more specialist areas such as bonds, equities, real estate and alternatives: "Since alternatives in particular can require a lot of specialist knowledge, we bring in people from various backgrounds."

Demonstrating an ability to understand and pick out the right managers for an innovative investment strategy, such as liability-driven investment, is a must for modern consultants.

Looking below

Cassin, rather than seeing the role of boutiques and middle-sized firms being squeezed by the mergers and expansions at the top of the market, hopes to benefit. He claims that "a lot of the merger activity has made funds unhappy" due to disillusionment in seeing their long-term consultants consumed into a larger entity.

Cassin stresses however, that any smaller firms aiming to make ground in the competitive market need to be proactive and ambitious. He agrees that "all consultants are being asked to do more than they used to one way or the other, whether that is by offering a wider selection, more specialist advice or managing assets as well."

Cassin is confident that bfinance are offering a way to meet this challenge. The consultancy claims not to operate along traditional lines of procedure.

For example, when it shuns the well-trodden path towards so-called 'beauty parades' where a consultant provides a fund with a buylist of five or six investment managers it recommends for a mandate.

Ian Shea, bfinance's head of equity manager research says: "We use a database instead to conduct a bespoke manager search. We invite offers from all suitable managers, who are then narrowed down in a transparent process that selects a few that are typically met with by the fund."

Hymans Robertson is another consultancy firm which underlines its independence and the innovation of its manager selection methods. The company also employs a database termed a 'manager radar' before making statistical and subjective assessment of which managers are best suited to service a fund's needs.

The variety of names that are thrown into shortlists as a result can bring up a few surprises. 

Some innovative ways of working, however, have not been universally welcomed.

Mark Hodgson, managing director at Gatemore Capital Management sees moves from consultants to take on the management of assets under fiduciary management models as an 'own goal', as far as some funds are concerned. Hodgson argues that this is creating a certain amount of fear for some pension funds who may feel that they are getting more than they bargained for from their consultants.

Hodgson feels that boutique consultants like Gatemore, which specialises in finding alternative and private equity managers, are well positioned to exploit this disenfranchisement.

Terry Ritchie, head of consulting at Capita Hartshead believes, however, that "large funds will continue to stick with the bigger consultants due to their quality advantages and the trust built through long standing relationships. If you have a enjoyed a good rapport with a consultant for 10 or 15 years already then why would you not want to continue that?"

Knowing the good from the bad

The undeniable fact that pension funds scarcely change their main investment consultants has sometimes raised fears that they are too cosy with their advisors. A greater willingness to scrutinise the advice on offer could benefit funds, it is argued.

Cassin claims there is "a lack of rigour in assessing investment consultants compared to investment managers" Part of the problem, he says is that "there is currently no standard industry way to assess a consultant's track record".

Cassin believes that trustees are getting better at spotting good investment advice from bad, however. This idea is shared by Hodgson, who says that "trustees are getting more cynical, and that's the right thing to do."

Hodgson argues that this cynicism is showing itself in a number of ways.

The increased number of consultancies in the market place is one. The developing trend of procurement agencies and independent trustees assessing potential consultants in is also keeping advisors on their toes, says Hodgson.

Colour of your money

While Hodgson agrees that the intense competition in the marketplace at the moment is placing some pressure on fees, he says there has always been pressure when it comes to cost.

More important is the race to offer enhanced value in the relationship consultants form with funds, Hodgson says.

Gatemore, for instance, try to specialise on the client side along with offering a clear investment philosophy based on Warren Buffet's long-term investment principals.

Geraghty says: "If you are trying to expand specialist research and offer the quality service that is required then this is of course reflected in costs. If it is clear where the added value lies then this becomes less of an issue."

He adds that "there is a lot more elasticity than there used to be as long as people still get a bang for their buck."

Ritchie argues, however "that everyone is looking for value for money". Pension funds unhappy with the costs of their current advisers often try out smaller firms, but typically only "for a one-off project to see what their capabilities are or to get an alternative view."

While these pressures apply to all segments of the market, there appears little reason for any firm to fear the consequences of increased consolidation and therefore polarisation. Ritchie says that "there is business for every sector of the market as long as a consultancy is innovative, nimble and delivers a quality service".

First published 22.09.2011

dbillingham@wilmington.co.uk