Consultants benefit from client returns

Thanks in large part to the excellent performance of their institutional clients' portfolios, investment consultants in aggregate experienced much stronger growth in assets under advisement in the year ended June 30 than in the previous year.

Worldwide institutional assets under advisement totaled $47.14 trillion as of June 30, an increase of 10.5% from the prior year. In contrast, worldwide institutional AUA was up 3% in the year ended June 30, 2020, data from Pensions & Investments' annual investment consultant surveys showed.

U.S. tax-exempt client AUA was up 11.9% to $26.39 trillion as of June 30 compared to a 4% increase the prior year.

Consultants said their clients benefited from a period of unusually good performance over the year ended June 30, with the S&P 500 index returning 40.8%; MSCI ACWI index, 39.9%; and Bloomberg U.S. Aggregate Bond index down 0.3%.

"Client performance far exceeded our own and our investment consulting clients' expectations. There was a right-tail event in the year ended June 30 and many clients beat their assumptions, their benchmarks and their peers," said Russell K. Ivinjack, senior partner and global chief investment officer at Aon Investments USA Inc., Chicago.

Mr. Ivinjack said there was strong performance across a range of asset classes including U.S., non-U.S. and global equities; private equity; and real estate.

"Everyone is thankful for high returns in the year ended June 30, but we're trying to be the sober ones, reminding our clients that returns like this are not likely to last," Mr. Ivinjack said.

Areas of strong growth for Aon continue to be consulting on liability-driven investing strategies for corporate defined benefit plans and OCIO assignments, Mr. Ivinjack said.

Aon had $4.14 trillion of worldwide institutional assets under advisement as of June 30 and retained second place in P&I's ranking, up 20.3% for the year.

Mercer Investments LLC, New York, has been working for some time with investment consulting clients that are worried about "what's behind the veil after an unprecedented period of fiscal and monetary policy comes to an end," said New York-based Rich Nuzum, global president for investments and retirements.

"Investors are concerned about what to do about fixed income given extremely low rates and are asking for advice about whether there will be hyperinflation or something else when policies change," Mr. Nuzum said, noting that "the answer is diversification, getting rid of country bias and embracing globalization."

Mercer's client teams are working with investors to protect their portfolios through asset allocation adjustments and additional diversification, Mr. Nuzum said.

He added that after the policy changes and when consultant-asset owner in-person meetings resume, "consultants that haven't pushed for diversification with their clients likely will be replaced," noting that Mercer is "getting some of that business now."

By way of diversification, Mercer is seeing strong interest from its client base in a broad swath of alternative investment strategies, with private credit attracting the most commitments from almost all client types. The exception is U.S. defined contribution plans, which are "outliers," Mr. Nuzum said, because plan sponsors are wary about the threat of participant lawsuits regarding alternative strategies.

Managers of corporate defined benefit plans that have been closed to new participants and have covered liabilities so contributions are not required "have an appetite for U.S. private credit and are turning to private credit as part of risk management," Mr. Nuzum said.

Mercer remained the largest consultant in P&I's ranking based on worldwide institutional AUA with $17.35 trillion, up 8.7% in the year ended June 30.

Mercer, Aon and Willis Towers Watson PLC, London, the third largest consultant, also are the three largest managers of OCIO strategies.

OCIO assets managed by investment consultants in P&I's universe totaled $1.45 trillion in the year ended June 30, down 4.3% compared with the prior year and up 79.4% over the five-year period. Part of the reason for the decline in OCIO assets under management as of June 30 was due to the absence of Boston-based Cambridge Associates LLC, which was the largest OCIO manager in P&I's 2020 survey with $351 billion assets under management.

Cambridge was also the seventh largest manager of worldwide institutional assets under advisement with $2.27 trillion in P&I's 2020 survey.

Cambridge declined to complete P&I's consultant survey this year.

Mercer managed OCIO strategies totaling $393 billion, up 28.5% in the year ended June 30; Aon managed $212 billion, up 16.9% from the prior year; and Willis Towers Watson managed $183 billion, a 23.1% increase.

Willis Towers Watson had worldwide institutional assets under advisement of $3.6 trillion as of June 30, up 38.5% from the prior year.

"OCIO managers definitely are the winners among consulting firms with more progressive strategies, and are outpacing traditional investment consultant firms that don't offer OCIO management," especially when it comes to the impact of higher revenue from OCIO money management, said Kevin P. Quirk, a Stamford, Conn.-based principal at Casey Quirk, a practice of Deloitte Consulting LLP.

The growth of Aon's OCIO practice is "part of a secular trend in the industry as institutional investors, especially corporate defined benefit plans, address their governance and resource issues. In fact, we're seeing a barbell of action with some asset owners opting for OCIO and others developing internal management teams," Mr. Ivinjack said.

The double-digit increase in worldwide institutional AUA as of June 30 revealed in P&I's survey results confirms ongoing demand for investment consulting services.

"I think demand for consultants remains pretty strong. Markets aren't getting any easier and demand for advice continues," Mr. Quirk said.

Because of the growth of assets under advisement, investment consultant revenues should be "pretty good given their asset-based fee model," Mr. Quirk said.

Analysis of average revenue by type as reported by the consultants found that the revenue from investment consulting services for institutional asset owners dropped to 79.2% as of June 30 (prior year, 81.1%); followed by investment outsourcing, 8.3%, (6.6%); other consulting clients, 5.8%, (6.5%); managed funds of funds or separate accounts, 3%, (2.8%); other services, 2.9%, (2.4%); and services provided to money managers, 0.8%, (0.6%).

But even with higher revenues in some areas, "consultants, especially small or under-resourced firms, are starving, especially given the rising cost of essential technology. Merger and acquisition activity will increase and consultants with OCIO capability will be most in demand," Mr. Quirk said.