Asset Managers’ Latest Big Investment: Consultant Relations

Consultant buy-lists are key to scoring institutional mandates—and asset managers are spending to get there.

Asset managers have long courted the world’s largest asset allocators in hopes of landing lucrative mandates. But increasingly, managers are working to woo allocators’ gatekeepers, as well. 

Investments firms have doubled down on consultant relations in recent years, ramping up both the quantity and quality of employees responsible for interacting with sector. The importance placed on consultant relationships by asset managers has nearly doubled in the last five years, according to research by Cerulli Associates. In 2011, 42% of managers surveyed rated the function as “very important.” Since then, the percentage has grown to 79%.

“What was once a nice-to-have is now a must-have,” said Chris Mason, a research analyst at Cerulli.

In the past, Mason explained, consultant relations teams might have consisted of one or two people setting up meetings between advisers and portfolio managers. Now, these units have evolved into a robust, multi-person departments armed with CFAs and investment expertise, their sole purpose to make nice with consultants.

“These are dedicated people who spend the entire day calling on and trying to set up meetings with these consultants,” Mason said. “Asset managers are relying on their consultant-relations professionals to be able to speak to the particular nuances of their strategies and have more of an investment background.”

Managers have invested so much in these teams, Mason continued, that many consultants feel overwhelmed by the sheer number of incoming meeting requests from asset managers.

So what’s prompted this sudden consultant relations arms race?

Consultants themselves are not new. Use of an independent investment adviser—particularly for public pension funds—has been an industry norm for several years. Consultants intermediate the vast majority (86%) of US-based institutional investor-provider relationships, and have done so for years, according to Greenwich Associates. 

“One of the reasons we haven’t seen a meaningful drop-off in consultant usage is every year there are new and different challenges,” said Sara Sikes, vice president of Greenwich Associates’ investment management practice. “As a result, institutional investors still rely heavily on experts with deep knowledge of the issues to provide advice and guidance.”

In particular, Sikes said asset owners rely on the “breadth and depth” of knowledge consultants bring to manager selection. Most allocators don’t have the internal resources necessary to evaluate every potential asset manager, she argued.

“In many cases, they don’t feel well armed to make the decisions on their own,” Sikes said. “They feel more comfortable having a consultant advising on the decision.”

The relationship makes sense: Consultants have the capacity to research a wide range of managers, as well as insight into what strategies might work best for a particular fund based on their experience advising other asset owners. The trade-off is that consultants end up with a significant amount of influence—so much that any manager pursuing an institutional mandate likely has to go through a consultant first.

Cerulli data show that 58% of net flows to asset managers were consultant-intermediated in 2015. Yet according to Greenwich Associates, consultants endorse a tiny number of firms. Roughly 3% of US equity managers and 8% of fixed income managers make the buy-lists.

To have a chance at institutional money, managers need to get on those elite lists. And to get on those lists, they have to “put their best foot forward,” Mason said.

“In order to target these consultants and get in front of them and educate them on their strategies, they need to have a dedicated team on staff,” he said.

Yet the more managers bulk up their consultant-relations teams, the more skewed the ratio of advisers to lobbyists becomes. And the more relationship professionals per individual consultant, the more people there are competing for an individual’s time.

“As institutional asset managers continue to build out these consultant relations teams, the effect is that it’s been extremely difficult for managers to get in front of consultants and target them,” Mason said.

And so the arms race continues. Over the next three years, 89% of surveyed managers said consultant relations will be “very important,” according to Cerulli.

“If you want to play in the institutional space, consultant relationships are a must-have,” Mason said.

Related: How Do You Solve a Problem Like Consulting?

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