There are a variety of reasons why investors hire investment consultants. One of the primary reasons is to choose investments based on their own personal preferences. Individuals typically rely on investment advisors and brokers for this task. However, institutions also use investment consultants to manage their pension plans and endowments. These consultants provide a range of services, including strategic asset allocation and performance monitoring. Depending on the type of investment consultant hired, fees may range from a few hundred dollars to several million.
Although there are many benefits to hiring a consultant, these professionals generally lack regulatory oversight and often offer advice that conflicts with their own interests. For example, a consultant may sell performance services to other investment managers, which may have an interest in the assets of the advisory firm. If a manager does not purchase the performance service, he or she will not be included in the consultant’s database. Consequently, there are risks of conflicts of interest and high fees associated with using a consultant.
Despite the benefits of consulting services, investment consultants also face difficulties. The decline of asset managers has led to reduced long-term returns and downward pressure on fees. Passive strategies are growing in popularity, and the traditional advisory model is being replaced by discretionary management. The assets under discretion of outsourced-CIO providers reached $1.56 trillion in 2017. While it may seem like a small number, it is important to understand how this process works.
In addition to offering specialized services, investment consultants also provide various services. Their expertise includes asset allocation, asset liability modeling, performance measurement, and educational programs. They advise plan sponsors on all aspects of the investment management process. While there are many benefits to hiring a consultant, they are not regulated and credentialed. As a result, they are not subject to state or federal securities regulations. And because the job market has remained competitive, they are often seen as a low-cost alternative.
While investment consultants are not immune to these challenges, they do have a more flexible approach than their rivals. They do not limit themselves to one asset manager, but they do have access to multiple investment managers. Some investment consultants may focus on one asset manager or another based on their own preferences. For instance, a consultant may choose to work with a multibillion-dollar fund manager, whereas a smaller firm may opt to hire a smaller one.
Investing in the stock market is a high-risk endeavor. The biggest investors have a lot of risk-reward ratio, and the risk of losing their money is high. But a good investment consultant can mitigate these risks by focusing on a few key factors. Whether they have the best track record or is the most ethical choice for a fund manager, there are many ways to select the right one for your needs.