It’s a constant challenge, isn’t it? Finding something good to read I mean. There are many ‘Top 10/20/50/100 Books of All Time’, and yet when I look at them, in many cases, I tend to mistrust the worth of the titles mentioned without looking at the book cover itself. Does anyone else judge a book by its cover rather than just by a review? Not a winning strategy all the time, and it has let me down on occasion – but it has also led me to some great authors.
My somewhat flawed book-choosing methodology means that I regularly look for something else to read to save me from whatever book I’ve launched myself into, and come up disappointed. In this instance, I needed a temporary break from Spike Milligan’s “Adolf Hitler: My Part in his Downfall”, as the jokes were coming too thick and too fast. The style was really starting to test me, and so I thought I would read something short, ‘work’ related, and, well, not funny.
What I ended up reading was a paper by Jay Youngdahl, Lab Fellow at the Edmond J Safra Centre for Ethics at Harvard, entitled “Investment Consultants and Institutional Corruption”, which was emailed to me by a friend. Catchy title, I thought – let’s see what’s going on inside.
It turned out to be a very interesting distraction. I won’t go into the detail of the paper, since you can always read it for yourself , but the jist of the paper summed up in one sentence is that “..(the investment consulting) profession failed to protect asset owners in the recent financial crisis and has yet to engage in serious self-examination”. According to Jay, there are conflicts of interest all over the place in the industry.
To those who thought/think consultants did/do a poor job – it might be interesting to pause for a moment, and think of a world without them. All of the difficult investment decisions would then need to be taken by in-house ‘experts’ (ex-bankers perhaps?), or outsourced entirely. In my career, actuaries seem to regularly attract quite scathing criticism, so thank goodness I’m not one of them. But again, I think it would be interesting to think of a world without them. How would the average pension fund possibly plan for the future with regards their ageing scheme members? They’d need to make all sorts of assumptions about investment returns, ill health retirals, inflation and longevity – in effect, they would end up becoming actuaries themselves.
I don’t recognise the consultants and the consulting industry referred to in Jay’s paper, and indeed if the consultants referred to in his paper were judged next to some of the people I’ve worked with in my career, they’d come off as being significantly inferior. Most I would say are good or very good, but there are a few that are breathtakingly knowledgeable, competent and thoughtful when it comes to working with clients, and trying to help them navigate a difficult course through treacherous waters.
I’m not going to suggest that you, dear reader, rush out and ‘hug a consultant’. But it would be interesting, if thinking about whether your consultant has added any value to your scheme, that you also consider instances where advice provided was not taken, or whether the consultant that you hired was restrained in any way in terms of coming forward with new ideas or suggestions.
Back to Spike’s book now for me. Suddenly I feel the need for something more upbeat than thinking about the financial crisis!
Blimey! Having spent a chunk of my career working for a large investment consultancy firm, I must say I didn’t recognize many of the problems, concerns or conflicts that Jay came up with – and given the US centric nature of the paper, then perhaps I was never going to. However, it did get me wondering – how much value was added by consultants in the run up to, during, and after the financial crisis?
The run up: I started my consulting career in October 2007, just as things were starting to look a bit unsettled in the financial markets. All of my peers were working with clients to either ‘de-risk’ (predominantly corporate sector pension schemes) and/or ‘diversify’ (predominantly LGPS schemes) investment strategies. This basically involved discussing existing pension fund liabilities, funding position and investment strategy with clients, undertaking educational activities where possible, and coming up with ideas as to how any particular investment strategy might be better diversified, with modelling underpinning the work done. To my eyes, some clients were more willing than others to embrace this approach, and some were more nimble than others when it came to making decisions and committing to making investments. Value-add by the consultant depended on, ultimately, the ‘trustee body’s’ willingness to listen to the advice being offered, and ability to make changes.
During: It was an incredibly busy, stressful time for both clients and consultants, with more ‘bad news’ coming out almost every day for three months straight. The period from September 16 2008 (the day after Lehman’s went under) to the end of December 2008 passed in a blur, with many pension funds wondering what was going on, how the crisis had happened, what it meant for them, and what they could do to try to protect their funds. The strategy of ‘diversification’ in its purest sense came undone, since the crisis that was unfolding was truly global in its nature and scope. There are many reasons for that, with some being more contentious that others, but the net effect was almost every asset class and every investor felt a significant amount of financial pain in one form or another.
In his paper Jay asks - could consultants have done more to protect clients in the financial crisis? My view, formed with the benefit of hindsight, is – yes and no. Yes, in that with markets having performed so strongly in the run up to Lehmans, more emphasis could have been placed on considering asset protection strategies – for example, using derivatives to short a particular market or markets. But also no, in that many trustee boards and Pensions Committees viewed any kind of derivative investment as being something they should be wary of, let alone the fact that putting in place such a strategy would be quite expensive, with no guarantee that it would ever pay off (remember, this is the point in time before the crisis hit). LGPS clients had the added complication regarding the use (or not) of derivatives as permitted by the LGPS Investment Regulations at that point in time.
After: Corporate credit was the first ‘opportunity’ that I really remember discussing with people in the post-Lehmans world. But since then we’ve had distressed debt, Emerging Market debt, high yield debt, long lease property, fundamental passive, infrastructure, and Diversified Growth Funds to name a few more such opportunities as put forward by consulting firms. So, on the face of it, consultants have been continuing to look for ways for clients to make positive, and hopefully meaningful, investment returns. But, again, the ability to wring any returns out of opportunities such as these remains as much linked to the willingness of individual Pensions Committees to take on board the advice, and consider the possibilities in the context of their own fund, as to the merits of the underlying suggestions.
Do you believe that consultants add value in the long run?
The answer may well depend on which side of the fence you are on – consultant or pension fund. During my formal time in the industry (as a ‘gamekeeper’ turned ‘poacher’ as it has often been put to me) I had my worth or usefulness as a consultant questioned just about as often as I was thanked for trying to help clients get to grips with different facets of, what I believe is, one of the most complex business areas that exist.
To those who thought/think consultants did/do a good job, or tried their best – that was my experience of working with other consultants. It wasn’t just about fees for them (which although might have seemed high on an absolute basis, still pale into insignificance when compared to asset management fees), and almost all of the consultants I knew and worked with did actually care about their clients, and genuinely wanted the best for them.
I'm busy working on my blog posts. Watch this space!