Investment consultants stoke conflict of interest concerns

The delegated investment business of consultants sits awkwardly with their advisory business, say some investment industry experts.
Investment consultants stoke conflict of interest concerns

Investment consultancy firms, in addition to giving advice, are now seeking to manage institutional investor assets under delegated investment management, potentially harming their impartiality.

The historical norm is for investment consultants to advise institutional investors on how best to invest their money and which asset managers to pick for their mandates. But a possible conflict of interest is now brewing as these consultants seek to compete with asset managers in managing the money of asset owners or implementing their own advice.

This broader business strategy is being pursued at a time when investment consultancy firms have been seen to be struggling to expand their businesses in Asia, which has led them to consolidate and experience more frequent personnel changes.

Some consultants admit there are shades of grey and perceived conflicts of interest when it comes to providing delegated investment management services. To try to counter that, they stress how flexible and transparent their services are. 

“If they just want advice they can just get advice. They want help in implementing that advice, we can do that and in the degree they want us to do. If they want to outsource the whole aspect around the investment management decision they can do so," Garry Hawker, Singapore-based director of strategic research for growth markets at Mercer, told AsianInvestor. "So clearly there are shades of grey in this particular area.”

There are perceptions of a conflict of interest, acknowledged Jayne Bok, head of investments for Asia at Willis Towers Watson (WTW), but that can be addressed by being transparent on fees.

“The consulting industry has more and more started to do work with clients on portfolios…. in terms of implementation. All of that is higher value-added service, all of that then results in either stable or higher margins,”  she told AsianInvestor.

However, a fund industry veteran at a leading bank who declined to be named told AsianInvestor that if investment consultants encourage institutional investors to use a manager that is its associate, they will have difficulties justifying the selection if their returns are not consistently better than other fund managers. 

“It becomes difficult for them to claim that they are providing completely unbiased, independent advice,” the Hong Kong-based advisor said.

An executive at a pension fund, who also declined to be named, said he has not engaged in delegated investment management but questioned on what grounds consultants would be better placed than asset managers when it came to implementation.

"If consultants are also managing portfolios, how are they different from asset management companies? How can they convince asset owners that they are better than asset managers," he told AsianInvestor.

The chief executive officer (CEO) of a global fixed income fund manager told AsianInvestor the desire of consultants to run funds also poses questions of structural transparency.

"It raises concerns of a lack of transparency. And are there sufficient Chinese walls between the consultants and the OCIO (outsourced chief investment officer division)?" 


For the time being, delegated investments are a small part of the total activities of investment consultants. They contribute little in terms of assets under management at Willis Towers Watson, for example,

The investment consultant advises on assets totalling more than $2.3 trillion across the world, but manages just under $100 billion on a delegated basis.

The company does not have a regional breakdown for Asia. But Bok said its delegated business has grown rapidly in the last five years, and Asia Pacific is a growing part of this business.

Delegated investment management is at a very initial stage in Asia, Hawker at Mercer said.

Alternative investments such as real estate and private equity have been some of the initial catalysts because of the greater complexity involved. Clients particularly need the help of consultancy firms in the private market space to build up their exposure over time, Hawker added.

But he denied that the company is ramping up its delegated investment business because of difficulties in the traditional advisory business, saying Mercer is still advisory-driven.

“We’re taking on more responsibility and doing a lot more for them than we would do [under] just advisory relationships. We're not seeing a reduction in advisory fees or anything else,” he said.


Both Willis Towers Watson and rival Mercer have seen some substantial changes to their senior staff in the past year.

“Investment consultants are in an industry that has changed…the more recent aspects are around improving our internal efficiencies and...helping to effectively get greater synergies coming through between our operations in the regions,” Hawker said.

He was talking about the merger of its investment and retirement divisions into the newly named wealth business in January 2017. The move reflects a global trend among investment consultancies, which face falling margins amid stiff competition for advising institutional clients.

Mercer's Asia head of Asia wealth management, Steven Seow, left the consultancy in December to focus on his own venture. It followed the decision of Janet Li to join from WTW in the newly created role of Asia wealth business leader, as first reported by AsianInvestor. WTW is understood to be not seeking to replace Li.

Investment consultancy firms are facing big difficulties to expand their advisory business in Asia. In China, the major sovereign wealth funds and institutions have largely been unwilling to pay fees and have built their own research teams.

Institutional investors are also increasingly using index-tracking or passive funds, said the fund industry veteran.

It's possible that the desire of consultants to get into asset management could adversely affect their relationships with existing clients, added the fund manager CEO.  

"We just met an institutional client [in Hong Kong] who had used consultants in the past and was very suspicious of their ability to fulfill their role [as unbiased advisers]," he said. "His concern was also due to an issue of resources. He wondered if their analysts, who were free to roam and make unbiased decisions, would continue to do that if their time and attention is focused on something else." 

The CEO added that the institutional client had previously employed a consultant to assess the performance of its investment portfolio at the end of each year, but last year asked some of his asset managers to do so instead.

"He found their findings to be pretty consistent with previous year's results of the consultant. And they did it for free." 

Richard Morrow contributed to this story.

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