Investment Consulting

Here are six best questions to ask your financial advisor and consultant to evaulate their firm's overall strategy:


1. What is your firm’s and your consultant’s experience working with other similar institutional investors?

You will want to ensure that both the firm and the individual consultant involved have the necessary skill and expertise to provide the services and advice you require. Both should be established in the industry and be committed to the consulting business. It may not be necessary that they have worked with a client who has the same profile as you do, as long as they can demonstrate how the skills they have applied to other situations can be translated to your situation. Having the comfort of knowing that the consultant has successfully guided another client (or clients) through the same situation you now face is one of the primary advantages of working with a consultant in the first place.

Though institutional investors are often lumped together, consultants require specialized skills and knowledge to work within the different regulatory and organizational confines associated with pension plans, endowments and foundations. Further, there are some consultants who act primarily as data collector, others who take the data they possess and repackage it into a usable form. Other consulting firms offer the first two services but also offer interpretation and advice to clients. Depending on what you require, you’ll want to ensure that the firm possesses the depth of services required to meet your needs.


2. Describe your service model in terms of deliverables for clients and the mechanism for delivery.

You’ll want to know what to expect from your consultant, in terms of level and detail of consulting support. Is the person you are speaking with at the shortlist presentation the same individual you will be working with on an ongoing basis, or a sales consultant who won’t be involved later on? Will the individual consultant be able to attend meetings, present reports and discuss results?

You’ll also want to ensure that the service model aligns with your requirements (i.e., it’s designed to encourage long-term relationships or designed to maximize profit over the short term) and that the process the consultant uses to make recommendations is transparent.

Finally, you will want to ensure that the investment consulting division is a meaningful part of the overall consulting organization—with the scope and scale to purchase or develop the necessary technologies and attract and retain the required resources to meet client needs. If the investment consulting firm is a stand-alone entity, it should be well established in the market and of a size that means it can achieve the same investment and retention requirements.

Occasionally just finding out who owns the consulting firm will tell you a lot about its commitment to professional investment consulting and the potential conflicts that may exists (potential conflicts will be explored in more detail later).



3. How do you ensure you retain your best professional staff?

A service business such as consulting can be only as good as its people. The response to this question should discuss how the mission and culture of the firm supports retention of professional staff, how the firm provides opportunities to work on challenging projects and how the firm offers opportunities for advancement.

The response should discuss how the ownership structure and stability—along with the overall work environment—support retention goals. As well, the compensation structure should be explained to show how it meaningfully supports retaining the best employees.

Having said this, it is difficult to retain the best people and offer the supportive environment if the investment consulting business is not growing. While explosive growth can lead to its own issues, more often it is a lack of growth that creates organizational instability and possible retention issues.


4. What additional services does your firm, or a related entity, provide? Where these services could create a conflict of interest (perceived or otherwise), how do you manage this to ensure that your firm is able to act in the best interest of the client?

You will want to ensure that there are no lines of business within the firm, or alliances with other firms, that could possibly create a conflict of interest or impair the ability to offer unbiased advice. It is often surprising just how commonplace these conflicts can be. Though not a complete list, some examples of potential conflicts could include the following:

  • Providing advice to clients regarding potential investment management products while also offering investment management products.
  • Providing investment management search to clients but presenting only those investment management firms that have paid the consulting firm to be part of the long list, have paid to be in the consultant database or have paid to be evaluated by the consulting firm.
  • Providing investment search services while also providing paid consulting advice to investment management clients regarding marketing or products.
  • Offering advice on alternative and traditional investment products while also providing brokerage/dealer services and/or underwriting securities and private placements.
  • Accepting soft dollars (payment for services through commission revenue) from investment transactions as payment for services.
  • Allowing potential candidate firms to underwrite the costs of hosting client conferences.
  • Providing plan member recordkeeping search services to clients while also offering recordkeeping services.

Consulting firms that have no ties or affiliations with investment management firms or other financial institutions and that do not offer services that could conflict with their consulting business are best positioned to provide a client with unbiased advice.


5. What unique capabilities and deliverables can we expect from your firm? How will these be of benefit? What specialized tools and research does your firm provide, and how do these benefit your clients?

Most firms that have demonstrated adequate expertise in their response to Question 1 from Part 1 (What is your firm’s and your consultant’s experience working with other similar institutional investors?) are going to be able to offer the types of services required by most institutions. The dilemma then becomes how to move from basic qualifying criteria to selecting the firms that are appropriate to work with. The questions relating to service models and professional staff retention (also in Part 1) will assist in this regard, but so will asking what unique capabilities and deliverables you may have access to as a client of the consultant.

In short, you will want to see what tools and services are available and how they will assist you, as a busy fiduciary, to make better decisions and monitor your investments. Leading consulting firms have the ability to take the complex intricacies of investing and distill them into a clear and concise format that supports understanding and decision-making (this is also related to Question 2, Describe your service model, in Part 1). Firms that are not completely committed to their investment consulting practice will have few specialized tools and very little value-added research and services.

Some services that may make your job easier could include the following:

  • organizing agendas for meetings;
  • organizing all presenters to the committee;
  • taking minutes or reviewing draft minutes; and
  • creating tools, such as a fiduciary portal, to help manage the many moving pieces involved in the investment program and to provide an archive of materials for current and future decision-makers.

These value-added services can help move the evaluation process beyond the “many flavours of vanilla” of traditional investment consulting, so that decision-makers do not fall back on deciding based on price alone. (However, as we will explore in the last question, it can be difficult in some cases to know how much you will pay your consultant in advance.)


6. How is your firm compensated by your clients and others (all sources, monetary or otherwise)?

There are various ways a consulting firm can be paid (i.e., hourly fee, retainer, on a project basis, commissioned selling or directed trading commissions). Hourly fees offer the most flexibility, but it can be difficult to determine in advance how much consulting services will cost. In the wrong hands, a retainer structure can lead to consultant complacency rather than a proactive approach.

You will also want to monitor the total fees generated and ensure that they are appropriate based on the value add provided by the consultant and compared with industry norms. Relating back to Question 4, you will want to understand the level of transparency of fees and how this relates to some of the potential conflicts of interest at the consulting firm.

Confirm if access to specialized tools and research is part of the consulting package or if it is something that needs to be requested and paid for separately.

Lastly, be aware of fee arrangements that may not be in your best interest (e.g., an arrangement that motivates a consultant to recommend work that may or may not be necessary in order to generate extra revenue).