The environment for asset consulting firms is quite challenging. Historically, there have been few barriers to entry, and measuring the value-add provided by the asset consulting firm has been difficult to gauge. As such, hiring decisions have often come down to price, with the low bidder more often than not winning the assignment. For those firms fortunate to be given an assignment, the life cycle of the relationship is generally fairly long (about 7 years), as it usually takes a departure of the consultant or a major screw up before the relationship is terminated. This practice has to change.
Given the current state of defined benefit plans in the US and abroad, this is not the time to fiddle while Rome burns. It is imperative that asset consultants be judged for the value that they bring to a relationship, and they should be compensated based on that value-add. There are many services that consultants provide, but the importance to the success or failure of a plan varies widely. Establishing the right plan benchmark is critical, and it isn’t the ROA. We believe that it should be the plan’s specific liabilities. The investment structure and asset allocation that flows from a greater knowledge of the liabilities are key decisions that drive most of the plan’s subsequent return. However, it seems to us that most of the time (80/20 rule) is spent on trying to identify value-added managers. Get the wrong asset allocation and the best performing managers in the weakest asset class won’t help you much.
Let’s see if the industry can refocus on the importance of DB plans, so that we can stabilize the retirements for both our private and public workers. As such, let’s begin to evaluate consulting firms that can improve the funded ratio and funded status, while minimizing contribution costs. These are the important metrics when evaluating a consulting firm and their consultants. Experience matters in this industry. We pay great homage to it on the asset management side of the business. Why isn’t this as critical when evaluating asset consultants? Remember: asset consultants have a greater impact on your plan than any individual manager does!