The unprecedented fragmentation of the advice industry and the high establishment rates of self-licensed boutique advice firms has fuelled growth for smaller players in the investment consultant arena. For smaller licensees, there is far more outsourcing going on and consultants are being used for a greater array of services to which the licensee is heavily dependent. The changes throw up many questions, including how will regulators view the expanding business models of both investment consultants and research houses in our politically charged environment?
The growth of smaller advice firms and licensees in recent years has seen the emergence of a range of smaller players like Invest Sense and Evergreen Consultants challenging the dominance of the established retail research houses and institutional players like Mercer. These smaller firms are generally servicing the small licensees who desire highly customised approaches including in many cases the establishment of an investment framework, APL and representation on investment committees. The unprecedented fragmentation of the advice industry and the high establishment rates of self-licensed boutique advice firms has fuelled growth for these 2nd tier players. The recent slow-down of new license approvals and the increased rate of license de-registrations may hurt some of the 2nd tier consulting firms depending on their exposure.
In terms of product, the explosion of managed accounts and MDAs has provided further opportunities for investment consultants to diversify their services with the provision of tender management as fund managers pitch to win investment mandates. While this has always been a core service for the institutional players like Mercer and Willis Towers Watson, even the smallest 2nd tier consultants have extended into this space.
For smaller licensees, there is far more outsourcing going on and consultants are being used for a greater array of services to which the licensee is heavily dependent. They are in effect, becoming trusted insiders.
For the largest players who provide both product research and investment consulting services, we are likely to see the continued cross-subsidisation of expensive research by their other business lines (like charging fund managers and super funds for ratings) and also in the way consulting services are packaged and priced. Some research houses are now charging basis points for provision of portfolio services.
With the industry undergoing such flux and change, an important question is how will regulators view the expanding business models of research houses and investment consultants, particularly in this new politically charged environment where vertical integration and management of potential conflicts are in sharp focus?
In what some may see as an ironic development, the bourgeoning growth in the number of modern self-licensed boutique firms has been advanced by the greater scrutiny of the Big 6 financial institutions by ASIC.
ASIC have granted licenses for these newer firms to operate in unprecedented numbers in recent years. Due to lack of scale, many of these new firms have turned to outsourcing as an operational imperative.
SME’s are outsourcing to many agents to help run their business in this new financial landscape; software for back office administration may be a relatively benign example of this behaviour. But does turning to the wider variety of investment consultants now operating, ie getting assistance with product choice and building APL’s – raise questions of accountability in this area? Whether deliberate or not, does this dynamic amount to an outsourcing of risk?
If there were regulatory questions asked, who would bear the ultimate responsibility for product choice and delivery? The SME who placed the product on their list or the expert investment consultant who told them to do so? These are the types of questions that should be thought about when selecting different providers to help compliment businesses.
As important as the role played by investment consultants is, Research Houses face similar questions. We'll take a more detailed look at the role of Research Houses in our next edition.