Few choices have a greater impact on the performance and overall operations of institutional pension funds than the selection of an investment consultant.
A report by Greenwich Associates—Choosing the Right Investment Consultant—identifies some questions plan sponsors should answer before hiring a consultant:
• “Do we need a general consultant, or do we need a firm that has the ability to assess and manage specialty asset classes like real estate, hedge funds and private equity?”
• “Are there other pension management tools we need from our consultant like portfolio risk modeling or asset/liability analysis?”
• “Do we want our consultant involved in strategic issues such as asset/liability analysis or do we plan on using a separate, external firm for these topics?”
Fiduciary responsibility is also an issue. Greenwich believes that investment consultants who refuse to accept fiduciary responsibility are fighting an inevitable tide. “If your consultant makes decisions for your fund on behalf of the board/committee/participants,” says Lori Crosley, a consultant with the firm, “it is highly likely that, in the event of any legal action, the consulting firm will be found to have fiduciary responsibility, regardless of what the contract says.”
Among the most important selection criteria for many fund executives are explicit and implicit conflicts of interest on the part of consultants. The issue has become more complex as a growing number of investment consultants have begun offering investment management products.
However, says Greenwich, excluding from consideration all consultants marketing their own investment products would eliminate many of the industry’s most capable firms.
To comment on this story email craig.sebastiano@rci.rogers.com.