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What is Investment Consulting?

Investment consulting (a.k.a. investment management consulting or management consulting) is the business of providing advice to clients in the form of advisory and investment management services. Operating outside of their clients, professionals in investment consulting jobs are third party advisors. But as any consultant will tell you, sometimes projects for a specific client can last years.
Who Uses Investment Consultants?

Pension funds are the largest users of outside investment consultants, providing advice on investment and strategic decisions. A 2011 survey by Pensions and Investments, 94% of pension funds use outside investment consultants.1 One example is the California Public Employees Retirement System (CalPERS), the nation’s largest public pension plan. With roughly $285 billion representing roughly 1.8 million members and their families, they paid out $33 million in fees to outside consultants in 2012.2 charitable foundations, sovereign wealth funds, and endowments entrust investment consultants to help get investment decisions right.



Financial advisors and private wealth managers like family offices may also outsource a portion of the investment decision-making process to consultants. This ‘investment outsourcing’ sometimes includes on-demand, specialized investment solutions, and research. Consultants can help advisors de-risk their client’s portfolios through diversification and other strategies such as adding liquid alternatives (liquid ‘alts’) to portfolios.

Corporations also utilize the services of investment consultants. Offerings include implementing an employee benefits package, aiding a corporate retirement plan sponsor, human resource management, executive compensation and M&A advisory services.3
Why Use Investment Consultants?
Manager Selection

Combined, public pensions have entrusted approximately $324 billion to hedge funds and private equity funds to seek non-correlated returns.4 And these fund managers aren’t cheap-charging fees as high as ‘2 and 20’ (2% of assets under management and 20% of profits). When the fund’s performance doesn’t beat the markets, there’s significant pushback by pensions regarding the excessive fees paid to managers. Consequently, pensions, foundations, and endowments use investment consultants to help with the manager selection process.



Some managers manage to ride the wave of a bull market in their asset class (stocks, bonds, commodities, etc.) without adding any alpha. Alpha is a measure of performance on a risk-adjusted basis. It compares the returns from an investment against a comparable index so it tells you how much, if any, outperformance is coming from the manager’s selections versus the movement of the market as a whole. Through detailed performance attribution models, a shrewd investment consultant can measure the true alpha of managers and determine whether they’re earning their fees.
Risk Management

Investment consultants help managers control risk, providing an independent voice to validate and vet ideas. It’s of paramount importance that money managers “get the investment right” as trillions of dollars of client funds and accumulated pension benefits are at stake. Financial organizations operate in an increasingly litigious manner, and the use of investment consultants can act as a risk management tool if an investment goes bad.

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