The Elephant In The Room

This September, a landmark research study of institutional investment consultants was released that continues to have big implications for both institutional and retail investors.

Three University of Oxford professors found that investment consultant recommendations really aren’t making the grade. Over a 13-year period, consultant recommendations under-performed passive investment strategies by 80 to 100 basis points.

It’s not easy to write-off this research. The academics studied the performance of the top investment consultants who control 82% of the institutional market. These institutional pension funds and endowments manage trillions of dollars in assets.

The Smoking Gun

The study confirmed what everyone always suspected, namely that investment consultants don't consistently find money managers who beat the market. Equally as damning, though, is that the research found institutional investors happily followed their bad advice.

The question is why?

Like the corporate maxim that no one was ever fired for buying IBM, institutional portfolio managers know they can insulate themselves from criticism if they follow the advice of the brand name consultants. To use a non-technical term, this is “CYA” in the classic sense.

The Implications for Wealth Advisors

Many independent wealth advisors have designed their firms to emulate the institutional consulting model because it makes them look smart.

Wealth advisors also rely on investment consultants such as Fortigent, Envestnet, the major custodians, or they have their own  internal research group for money manager selection. Advisors then follow those recommendations to implement  their clients’ investment plan.

With empirical proof that due diligence by third parties is flawed, the real question is whether wealth advisors should continue to embrace that model for their clients.

In fact, the investment consultant model may still work in a board-dominated, institutional investment world, but for wealth advisors responsible for the welfare and asset preservation of individuals and their families, it probably doesn't.

Perhaps, then, it’s time for advisors to recognize that picking money managers that beat the market is next to impossible – and adjust their business model accordingly.

A Different Focus

Rather than spend the time on selecting money managers, maybe a wealth advisor’s effort is better deployed on the other things that are also important to clients: Financial planning, tax strategy, asset allocation, behavioral support and wealth transfer, as well as exceptional service.

In fact, the Oxford researchers noted that “soft factors,” such as the quality of service, asset liability modelling and “handholding” during difficult markets, were important to institutional money managers too.

Eat Your Own Cooking

For wealth advisors, there’s a virtue in accepting the reality that it’s practically impossible to consistently pick money managers who will beat the market.  

Most wealth managers have come to that realization personally and invest their own assets in passive strategies sprinkled with a few hedge funds or private investments where the managers truly eat their own cooking.

Which leads to the next key issue. How authentic can you be to your clients if you’re managing your money using a different strategy than you are recommending?

It’s a very slippery slope to recommend one strategy for your clients, and follow another with your own money.  You too need to eat your own cooking.

At the end of the day, wealth advisory firms need to make sure they can deliver on their firm’s value proposition, but MOST importantly they need to believe it!