The asset management industry is lavishly appointed with consultants. There are the Big Four (Deloitte, PwC, Ernst & Young, KPMG), all the management consultancies available to any other industry, and, increasingly, a battery of specialist consultants that cater exclusively to the needs of the asset management industry.
So, what is the point of all these consultancies? What exactly do they do?
It has to be said that consultants sometimes don’t help themselves. Who doesn’t cringe when they read about ‘blue sky thinking’ or – yawn – ‘sustainable long-term value creation’ in yet another wordy report that doesn’t really say very much. The more squillions of euros you’ve paid for the report, the bigger the cringe – or so I imagine.
This brings us nicely to what can be a key selling point for the smaller, specialist consultancies focused on the asset management industry – a group that is, one senses, something of a breed apart.
“The Big Four are expensive,” explains Nick Baker, executive director at London-based Alpha Financial Markets Consulting, candidly. “We are quite a lot cheaper.”
However, cost is of course not the only factor that influences asset management firms to use these smaller specialists. In fact, the clients themselves don’t emphasise cost at all.
“Cost should be a factor for the asset manager but in practice it usually isn’t,” says Stephen Turner, BNP Paribas Securities Services. “If an asset manager is going to make a radical change to its operation, then paying a million or so to a consultant sounds like a lot, but they tend to do it.”
BNP Paribas Securities Services itself recently shared a bill from Alpha with a client for a large seven-figure sum for managing the transfer of funds after the client acquired a large long-only business.
“Both ourselves and the customer were happy with the value we got,” says Turner, who emphasises that the benefit of using an outside consultant for this type of transition, where duties run to managing internal and external teams and making sure people attend meetings, can be quite subtle.
“The fact that they’re neutral is a huge advantage,” says Turner. “They can be like a golden thread running through the project making sure that the three companies are aligned.”
But what of the choice of a smaller, specialist consultant for the project rather than a larger firm? As a firm, BNP Paribas Securities Services uses both larger and smaller consultants. Larger consultants tend to be brought in for projects involving process reengineering or in-house projects.
For Turner, a key advantage of the smaller, specialist firms is their industry expertise. “The connection into asset managers and COOs is better,” he says.
This tallies with what the smaller consultants themselves see as one of their key selling points, particularly when compared with the Big Four.
“We can’t compete with the Big Four in terms of scale and size but we know the investment management business inside out,” says Peter Ellis, managing director of the investment management consultancy Investit. “The Big Four sometimes draft in consultants from other parts of the business who are not asset management specialists.”
Raymond O’Neil, a founding member of Kinetic Partners, emphasises the fact that his firm has drawn people from all areas of the asset management business on to its team. “We have a broad expertise from across the industry,” he says. “If there’s difficult situation we understand what it is.”
And there are, of course, advantages to being small. Turner emphasises flexibility.
“A firm such as Alpha FMC is quite lean,” he says. “With a firm of that size the team is very professional. Once a firm starts getting larger, the quality dissipates.”
Some say this is what happened to CSTIM, formerly Morse and now part of Navigant Consulting.
Another potential advantage of smaller firms is that they might be more willing to roll up their sleeves and get their hands dirty.
Fred Ponzo, who recently left the technology consultancy NET2S after it was acquired by BT to set up his own consultancy, GreySpark, says that about half of what his firm does is advisory services with the rest being hands-on delivery.
“When we work for a client we have the ability to deliver what we are advising them to do. That’s why they come to us: we offer advice and implementation.”
Another advantage of using a specialist consultancy – and one that for some asset management firms can be crucial – is that using a smaller consultancy can make it easier for the asset manager to retain ownership of the project.
“If you bring in Ernst & Young or KPMG, 50 people will come and they will own the project,” says Ken Fry, global head of IT & operations at Aberdeen Asset Management.
That’s why, although Aberdeen works with the Big Four on tax and auditing projects, it preferred the likes of Alpha FMC both for the Credit Suisse transition and for the earlier transition when it bought Deutsche Bank’s UK asset management arm.
“That way you retain control,” says Fry. “If you don’t contain control that’s a problem.”
Of course, all of these consultancies are configured differently and offer a different spectrum of services. Investit and GreySpark are rather focused on IT issues, whereas Kinetic Partners offers what the Big Four offer and more, and aims to be a “one-stop shop boutique”.
All about IT
However, the service offering of all of them has been affected by two key factors: the downturn and the increasing emphasis on IT.
A firm such as Kinetic Partners, for example, which one does not perhaps immediately associate with IT solutions, recently launched the Kinetic Partners’ Risk and Valuation Services (RVS), which aims to provide fund managers with a total outsourced risk management solution.
“A growing amount of what we do has an IT base,” says O’Neil. “We now have several offerings that are products rather than services.”
O’Neil sees valuation as a key area for the future and one where asset managers will look for more assistance. Accordingly, Kinetic Partners plans to expand its offering in this area.
“We are looking at acquiring businesses and expanding the risk service offering,” says O’Neil.
Meanwhile, at the more IT-focused Investit, Ellis has seen a rising interest in an outsourced IT management function since markets started to pick up in the third and fourth quarter of 2009 after the worst of the downturn was perceived to be over. Interest has come from specialist managers and hedge fund firms that aren’t big enough to have their own dedicated IT department.
“Their world has become more complex,” says Ellis. “In hedge fund firms you have people who are IT literate but who don’t want to have anything to do with IT. It helps them if someone can take away the complete management of their IT needs.”
Another expanding area is benchmarking of both outsourced and in-house services. Alpha FMC offers a range of benchmarking services covering areas such as investment operations and IT, transfer agency, distribution, client service, product development and outsourcing. Benchmarking of outsourcers has been a key area this year.
“Benchmarking gives a very useful insight into the asset management business and how a company compares with competitors,” says Baker. “Companies use it on an annual basis to validate outsourcing deals.”
Ellis, whose firm Investit is also increasingly asked to evaluate existing outsourcing deals although it hasn’t traditionally done this in the past, agrees that it’s often a matter of validation. “Clients want benchmarking almost as confirmation that the service they are getting is in line with market practice,” he says. “They don’t necessarily want to move to another supplier. Sometimes they are looking for a reason to stay with their current supplier.”
In the future, Ellis sees outsourcing increasing further – no doubt with a concomitant increase in benchmarking.
“There will be a new wave of outsourcing in 18-24 months time but not for the same reasons as the last wave which was cost reduction,” he says. “The main reason people will outsource in the future will be cost avoidance. As people get rid of legacy systems they can avoid cost by outsourcing rather than upgrading.”
This is all part of a future asset management landscape that, depending on who you talk to, may also include a new wave of M&A, relocation to the likes of Switzerland and Ireland in search of a better work/life balance for employees and more focus on dealing with regulatory hurdles.
Whatever the final shape of things to come, it seems these small, specialist consultancies will play an important role in Europe’s asset management industry of the future. Alpha FMC says there aren’t many big firms that it has not worked for. If you’re thinking, ‘They would say that, wouldn’t they?’ hear it instead from the horse’s mouth: “There are few companies that would look at outsourcing without using a consultant,” says BNPP Securities Services’ Turner.
©2009 Funds Europe