These are the gatekeepers, the traditional custodians of investor’s interests, the middlemen between those with the money and the fund managers that invest it. They are asset consultants and research houses.
Their power can be limitless. They can relegate any manager to the proverbial scrap heap and simultaneously anoint a competitor — spoiling reputations and prospects along the way — all with a single unflattering report.
And traditionally they have remained welded to their particular niche.
Asset consultants in the wholesale sector, researching and advising on manager selection and asset allocation to superannuation funds, and research houses acting as the eyes and ears of investors and their advisers in the retail sector.
But a revolution is taking shape that will see not only asset consultants and research houses increasingly encroaching on each other’s turf, but also on that of the very fund managers over whom they have reigned as judge, jury and executioner.
For asset consultants, the last 12 months have been the most dramatic growth period since superannuation funds first started using investment consultants en masse in the early 1980s.
The calendar year of 2001 was one where implemented consulting — in which asset consultants not only offer investment advice to super fund clients but also implement that advice through their own multi-manager investment funds — went from being the next big thing to well and truly having arrived.
Many of the major consulting groups that have been offering implemented consulting products for a number of years, William M Mercer, InTech, Towers Perrin and Frank Russell amongst them, finally saw a significant take up rate for the controversial service.
Frank Russell alone managed to win seven new implemented consulting clients in the second half of 2001, growing its business by 320 per cent to $4.5 billion over the year.
But the growing popularity of implemented consulting has only acted to reignite the debate over the conflicts of interest that can arise when asset consultants offer the service.
The motive for asset consultants to offer implemented consulting is clear. The traditional asset consulting business model has always involved investment advisers billing super fund clients by the hour. Implemented consulting on the other hand allows consultants to charge a fee, like investment managers, on the funds they have under management.
With total assets in Australia’s superannuation fund industry projected to grow from $527 billion today to over $900 billion by 2010, it’s not hard to see that the majority of opportunities lie in the latter.
But critics of implemented consulting argue that it places asset consultants in a position where they might be tempted to urge clients that rely on them as trusted independent investment advisers, to join the implemented service ahead of what may in some circumstances be more suitable investment alternatives.
Stripped of all the controversy however, what implemented consulting essentially signals is the move of consulting groups into funds management. And these groups have not been satisfied to restrict themselves to wholesale funds management.
Groups like Frank Russell, which now identifies its primary business as investment management and not consulting, are making a concerted push to reach retail investors.
Through its so-called Gateway distribution relationship with the ANZ Bank, Russell now manages some $3 billion worth of retail investors’ funds in its multi-manager sector specific and diversified funds.
Paragraph on Frank Russell’s new distribution dealÉto add on Wednesday morning!! Jayson take note
“The biggest difference between retail and wholesale is distribution. On the wholesale side, we can sell direct. But selling to the retail market is a different distribution skill. What we are looking to do is align ourselves with the best distributors in the retail market,” Russell managing director Alan Schoenheimer says.
But with so many of the major asset consulting groups moving into investment management, a gap appears to have developed in the provision of advice to super funds who would prefer to be counselled by a group with no interest in managing money.
That gap is unlikely to stay open long. Retail focused research houses, like Morningstar, who have traditionally rated only the retail capabilities of fund managers, have already started to rate the wholesale strengths of some managers.
Morningstar has also started to promote itself as a provider of asset consulting services to individual superannuation funds and is believed to be currently advising at least two very large funds.
Morningstar’s head of research in Australia, Daisy Chee (a former asset consultant herself), says a further push into the arena previously and strictly occupied by wholesale asset consultants, could be an important strategic move by the group.
“We certainly see the potential in the wholesale sector. All the research that we use to rate retail fund managers can be applied to the wholesale sector,” she says.
Of course, the premise that retail oriented research houses will move into wholesale asset consulting to fill the gap left by asset consultants moving into funds management, relies on the notion that research houses will not move into funds management themselves.
And that by no means is a given.
Chee says while the focus for Morningstar Australia is to remain an independent source of research on the funds management industry, she could not rule out the research house ever moving into some sort of funds management role. This is particularly so as the group seeks to align itself further with its US parent, which already offers investors the option to invest in some of its own managed portfolios.
Such a move would make groups like Morningstar and Frank Russell not only competitors in the consulting field, but also in funds management.
That is a possible reality when the wholesale and retail worlds converge and when the gatekeepers realise they are no longer restricted to their traditional backyards.
