(April 1, 1996 ) Investment Management Consultants: What's Behind the Veil? |
Investment Management Consultants: What's Behind the Veil? Chairman's Opening Speech at Hiring and Managing Investment Consultants Conference
One of the most important and controversial issues facing pension funds and investment managers today is the role of investment management consultants. Tremendous energy has been focused on the question of the appropriate expectations, goals and methodology for selecting investment managers for pension funds. However, remarkably little attention has been paid to the hiring and managing of investment consultants.
Consultants are the advisors, gatekeepers, interpreters, data collectors and information processors to the pension fund community. This is an enormous responsibility. Pension funds involve trillions of dollars and affect the economic security of millions of beneficiaries and their families. More than half of corporate plans currently use consultants. The percentages are considerably higher in the case of public funds (75%) and endowments and foundations (63%).
Yet, the business of investment management consulting has always been plagued with issues of perception versus reality. Investment consultants for the most part operate outside of the regulatory scheme. Fundamental issues, such as the role of consultants, capabilities of consultants, regulation of consultants, disclosure obligations of consultants and conflicts of interest in the consulting business have never been openly and clearly addressed.
At this point, under current law, it is generally up to the parties involved to identify and address all of these issues. There is virtually no federal or state law to guide you and very little information of any sort available for plan sponsors. It is critically important to develop a methodology for plan sponsors and money managers to follow in reviewing consultants prior to hiring them and in evaluating the on-going interaction between client and consultant. A standard of care and standards of professionalism must be agreed upon by all parties involved. Once the standards are established, any pension fund which fails to do an adequate due diligence of its consultant prior to hiring, and any consultant who fails to perform his duties in a professionally sound manner, will be at risk.
Make no mistake, investment management consultants play an extremely valuable role in the investment management process. I do not mean to diminish their role in any way. Decisions about investing pension assets affect the economic security of millions of beneficiaries and their families. These are decisions that even the most astute board should not make on its own. Too much is at stake.
No one needs any more data or information alone. There are already a plethora of computer software programs that provide investment related data. Clients are increasingly demanding that their consultants be able to interpret information and advise them. Intelligence, knowledge, judgment -- these are the qualities which must be the consultant's stock and trade.
The pension consulting industry has been fortunate. There have been extremely few instances of self-dealing or other abuses by consultants brought to the attention of the general public. Any dissatisfied clients generally have simply changed consultants rather than formally complained through litigation. It is in everyone's best interest that we begin to identify the problems that plague the investment consulting industry, implement solutions that rectify these problems, and thereby improve the relationship between consultant and client.
Questions to ask when hiring an investment consultant:
Is the consultant a fiduciary of its pension fund or money management client?
When the consultant recommends hiring its affiliate for money management, brokerage or other services, does any special duty apply?
Does the consultant have an obligation to disclose all of its sources of compensation received directly or indirectly?
What happens if, as in a recent case, the consultant is found to have misrepresented his background or credentials? If that happens, can the fee for years of discredited advice be recovered?