I was asked to comment in an article published in today’s Fundfire (A Financial Times Service) about the increasing presence of consultants in the institutional asset management business. According to Cerulli Associates, in 2013 consultant-intermediated new business jumped to 68.4% of the total, an increase of almost 10% from the year before.
There are a number of reasons for this jump, increasing product proliferation and complexity and cost.
We continue to see a large increase in the number of products being offered – and their complexity – in the face of the reality that it is getting increasingly difficult to “beat” the market in the traditional asset classes (large cap, mid cap, growth, value, etc.). In the constant race to beat the market (or in a goals-based scenario meet your funding goals), institutional investors have increasingly turned to alternative investments to supplement their asset allocation strategies.
There are a wide range of alternative investments, however, and finding qualified analysts to evaluate them is difficult. Let’s not forget that a traditional stock analyst is in most cases not qualified to analyze REITs, commodities, etc. Firms must hire new staff – which takes resources and brings us to the discussion of cost.
But first – plan sponsors have the fiduciary responsibility under ERISA that requires them to meet an expert threshold. You either have to build an organization that can stand up to regulatory scrutiny or outsource to a consulting firm that has such expertise. As the number of available products increases, so does the cost of building it yourself. The reality today is that you have to be very large to even think about having your own in-house capabilities if you want to consider investing in the plethora of new products.
To quote from the article: “The trend is probably reflective of how expensive it is to do it yourself,” says Andy Klausner, principal at AK Advisory Partners. “It’s much cheaper to hire a consultant and rely on them to help fulfill your fiduciary responsibility. You have to be relatively large to be able to afford the same level of resources in-house.”
Build it or buy it – which do you think is better?
