Investment consultants must demonstrate their worth amid rising concerns over cost and growing criticism that they do not add value.
In its latest report, The tortoise and the hare: passive is the new active, Nomura Global Markets Research says investment consultants could “find themselves pushed out of some markets”.
Investment consultants represent an extra layer of fees for pension plans, an important factor as the industry becomes more cost-conscious.
The report also questions whether consultants, which can influence asset allocation decisions, should be more tightly regulated, and whether they are too focused on short-term returns at the expense of longer term interests of plans.
Despite these challenges, Nomura says consultants may be able to entrench their stranglehold on pension investments in some markets.
The researchers concede that only a small proportion of funds specifically break out fees paid to investment consultants, limiting the room for further analysis.
“What we can conclude, however, is at the very least funds are paying a very wide variety of fees to consultants and so presumably at the very least some of them could make significant savings here,” the report says.
The report cites recent academic evidence that suggests investment consultants “add no value in fund selection”. It also discusses how the UK law commission has raised the question of whether consultants are too short-term and whether they require further regulation.
Academics Tim Jenkinson, Howard Jones and Jose Vicente Martinez published another report, Picking winners? Investment consultants' recommendations of fund managers, which suggests there is no evidence consultants add value in fund selection.
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