Pension Consultants: Frenemies or Friends?
Back from speaking about hedge funds to a large investment fiduciary audience, I've had some time to reflect on the many topics discussed during this sold-out FI360 conference. I keep thinking about one session in particular.
Focused on the role of the Investment Committee, a panel of veteran institutional investors and service providers waxed poetic about trustee selection, fees and the use of third parties. In response to a question about how to benchmark the performance of pension consultants, one panelist offered that seeking legal redress (in the event of a major problem) would make it difficult (perhaps impossible) to get sufficient responses to any future Request for Proposal ("RFP"). Other consultants, scared by a lawsuit against a peer, would shun the pension plan plaintiff.
Did the speaker mean to say that a pension fund should avoid rocking the boat with a consultant if, by doing so, they limit the universe of potential service providers for the next bidding round? More broadly, what is the optimal role of the investment consultant? How should a pension plan explicitly grade whether a consultant is doing a "good" job in terms of providing services such as those listed below:
- actuarial analysis
- strategic asset allocation
- selection and ongoing review of money managers
- fee due diligence
- financial risk management?
If a consultant signs on the dotted line as a fiduciary, are they frenemies or friends of the pension plan? How are their interests aligned as a result?
Ideally, service providers offer independent, objective information with the plan's participants interests in mind.
