The floodgates have opened in the investing consulting world, as a report by the Diligence Review Corporation questions the validity of advice among investment consultants in the US.
(January 16, 2013) -- Hewitt Ennis Knupp, Towers Watson, Milliman, Buck Global Investment Advisors, and Mercer Investment Consulting are just a handful of the dozens of consulting firms scrutinized in a newly released report questioning their independence and validity.
The report by the Diligence Review Corporation, which specializes in performing due diligence for private clients of SEC-registered investment advisors, focuses on investment consultants in the United States. It questions how such firms can offer conflict-free advice when they are also broker dealers, have broker-dealer affiliates, or receive compensation for client referrals. While the report claims that pension investment consultants raise relatively few red flags in a due diligence review, those that do raise such flags often provide services to some of the largest funds.
The report identifies 155 firms serving as pension investment consultants in the US. Of those 155 firms, five pension consulting firms are also broker-dealers, the paper claims, trading securities for their own accounts or on behalf of their customers while being paid on commission. Thus, the authors note that broker-dealers are not impartial to the products found in client portfolios. The research also highlights 10 pension consulting firms found to be registered representatives of broker-dealers, 33 pension consulting firms that have broker-dealer affiliates, and 12 pension consulting firms that receive compensation for client referrals.
"It’s difficult to understand how a consultant acting as a broker-dealer can provide objective, independent advice to pension fund clients. Indeed, decades of experience tell us it’s a rare broker-dealer that does so," the authors write in the paper, titled "US Pension Investment Consultants: A Report for Fiduciaries, Internal Audit and Risk Management Professionals."
Consultants named in the piece that responded to aiCIO's request for comment denied the allegations. "The statements and assertions of perceived conflicts or impacts to clients’ portfolios are not accurate for Hewitt Ennis Knupp, a division of Aon Hewitt" the firm said, which was listed in the report as having a broker-dealer affiliate and receiving compensation for client referrals. The firm aimed to clarify the description of its business in the report, saying: "We do not trade our clients’ accounts through broker dealers affiliated with us. Our manager research function runs independently from all other portions of Aon's business. We provide data and perspectives that help companies make informed investment consulting decisions. We take our role as a fiduciary very seriously and have in place strict policies and safeguards to ensure that we provide objective and unbiased counsel."
Russell Investments is highlighted in the research as having a broker-dealer affiliate, receiving compensation for client referrals, and facing significant adverse disclosures.
"Significant adverse events may occur for the firm itself or their 'advisory affiliate', which can be an affiliated firm or an employee," the Diligence Review Corporation's report said. "In our experience, when asked about these events, some investment consultants take them very seriously. Other firms dismiss these events as unimportant or irrelevant."
Russell issued the following response following the report's claims:
"A significant portion of Russell Investments’ activities are based on the 'multi-manager' approach to investing. As such, Russell recognizes that much of Russell’s business – not just its consulting business – depends almost entirely on the quality and integrity of Russell’s investment adviser research and recommendations. Russell, therefore, has a strong incentive to ensure it manages potential conflicts effectively to avoid even the appearance that its investment adviser recommendations may be compromised."
To that end, the firm said, Russell’s policies provide that it does not charge, and will not accept, compensation from investment advisers to be included in Russell’s manager research database or consulting recommendations. "Further, Russell’s policies provide that investment advisers are not required to purchase any of Russell’s affiliates’ products or services to be included in Russell’s manager research database. The sole criterion for an investment adviser recommendation is that Russell’s manager research analysts believe the investment adviser’s product is likely to outperform."
The solution, according to the report's authors, is a greater awareness and eagerness for investment consulting industry to appropriately manage potential conflicts of interest.
Read the full report on US pension investment consultants here.