October 27, 2022

The Rise of 3rd Party Search Firms That Find Consultants

The process of bringing in the right investment advisers for asset allocators has reoriented how the consulting industry does business.

Reported by Dusty Hagedorn

Art by Klaas Verplancke

Increasingly, asset owners are hiring consultants to find consultants. These search experts can help a plan’s board of trustees the whole market while also spotlighting any potential conflicts of interest.

One prominent search provider, Martha Tejera, project leader at Tejera & Associates, declares that she and her fellow searchers are very helpful in furnishing the due diligence required in evaluating consultants.

For defined contribution plans, it’s good to “be able to document it, so that if you are challenged later on, you can point to that process, as a way to manage risk,” she says. “Sponsors find that it’s just more efficient to hire somebody where it’s their area of expertise”

There are four types of investing consultants that the search advisers look for: Pure play consultants who only offer advice. Investment advisers who handle both advice and investment placements. Actuaries who, as the name implies, perform actuarial duties. And aggregators and asset managers, who look very much like investment advisers, but usually have proprietary investment products.

The consulting industry has come a long way. Over the past decade, it has expanded from furnishing just advice on investments, to such offerings as “outsourced chief investment officer” services, or OCIO for short, which run the money themselves. Firms such as BlackRock, JPMorgan and Goldman Sachs are prominent in the OCIO field.

Searchers need to be on alert for possible problems. To Alex Slivinski, investment director at consulting giant WTW, the issue of conflict of interest can arise from some OCIO providers, namely, when they use their own proprietary products. Retirement plans “have a fiduciary responsibility, to pick the best vendors and investors,” he says.

Still, Slivinski believes that search consultants add value for all parties involved. They “provide us greater insights into the market, into themes, and help us better understand what sponsors are looking for, to better service clients.”

What should allocators look for in a search provider? Slivinski warns that asset owners must make sure that their search people “understand your criteria and that they are representing your organization accurately, reconciling differences in perspectives between plans and providers.”

What should the search providers look for as they comb through prospective consultants? How they are compensated, for one. The “industry standard for advisory services is a fixed retainer,” Slivinski says. But some “OCIO services tend to be on an asset value … [and] some OCIO have retainers, and some have a performance incentive.” The search types must parse out exactly what the fee structure is. “It is not always clear and transparent what you are paying in an OCIO, with custodial services, securities lending, and sometimes commissionable products being bundled,” he says.

Finding out about the fees can be tricky. Tejera says that “in scenarios where the plan sponsor is paying the OCIO a fee to manage the overall portfolio, they shouldn’t have additional fees to tap into proprietary products.”

According to Slivinski, “most of the key players in the market operate with both pure play consulting and an OCIO, meaning they can give you advice and you implement it, or they can provide you advice and they can implement it.”

The searches can be as short as a few months to several years, with Tejera noting that her firm’s average time is 16 weeks.

The advent of OCIOs has increased the need for search providers, according to Steve Charlton, partner, and head of client solutions at consultancy NEPC. He notes that “the more concepts that are introduced into the business, the more necessary it is for a third party to be coming in to evaluate.”

Charlton says roughly a third of NEPC’s business originates from search providers. NEPC offers both advisory and OCIO solutions, with NEPC’s current OCIO business overseeing $60.7 billion in assets.

By Slivinski’s estimation, using searchers is good for plan sponsors. “It has opened up sponsors’ networks, while putting more competitive pressure on industry participants to improve services and lower service fees.”

Tejera says the “feedback we get is that [allocators] like it when there’s an intermediary involved [in the consultant search], because the process is more efficient, and even though they don’t win them all, they feel that the outcome makes more sense.”

The rise of search providers has “made it more of a rational process and less of a popularity contest or networking process,” she says. Before, “it was a less formal process, and it was a lot more about relationships, as opposed to capability,” Tejera says. “Relationships are still important, but I think relationships are built after you’ve demonstrated the appropriate skills and capabilities to deliver the service.”