Reflecting on 40 years in the investment industry, founder of Ennis Knupp & Associates and executive editor of the FAJ, Richard Ennis, tells Amanda White why the investment consulting industry is at risk of becoming a distribution arm for the money management industry.
For the past few years Richard Ennis has been phasing out of the firm he founded with Jim Knupp nearly 30 years ago, and the recent purchase by Hewitt Associates (which in turn is merging with Aon) was a logical time to retire. After being embedded in the industry for so many years, reflection is inevitable.
He says he is innately proud of the firm’s history: that it was founded on a principle of independence; and that it was successful on those terms.
“We are proud of the fact we helped establish the idea of genuinely independent firms,” he says.
Over the years Ennis Knupp has supported a number of innovations in the investment industry including the use of indexation as early as 1981.
“It was very difficult to persuade investors to use more passive investments, but we succeeded. We had the guts to say it is not easy to beat the market and we are researching managers as well as we can. Our clients had up to half of their assets in low-cost index funds and the other half pursued active or alternative investments.”
But looking into the future, from what he calls the 30,000-foot level, Ennis is concerned, and has been concerned for many years, about the risk of the investment consulting industry being co-opted by the vastly larger and more profitable money management industry so that consultants are being reduced to being part of the distribution system.
It’s a question of whether the courage exhibited by Ennis and other innovators is either enough, or even existent, in the face of today’s gargantuan powerhouses of investment management.
“It is similar to the frustration that must be there in medicine. In the US, at least, physicians fear they are being reduced to distributors of drug companies,” he says.
“Investment consultants are so outgunned by the investment management industry with their vast resources. It is hard for investment consultants to take a stand against, for example, private equity. It is very difficult for consultants, as investors are guilty of herding: what’s hot they get into.”
Recently Ennis was reflecting with contemporaries – Bill Sharpe, Charles Ellis and Jack Bogle who all have a common aspiration of improving the world for investors – about the lack of change in investor behaviour.
“One thing I am disappointed in, and I commiserated with them, was that we didn’t have more success. Investors are no more willing to stand independently than they were 30 years ago, whether it’s enhanced indexing or portable alpha,” he says. “Consultants are too meagre an influence, it’s a lament of mine.”
It’s connected, he says, with the parallel issue of consulting firms moving into the money management business, and the wider trend to outsourcing. Something Hewitt Associates is good at.
“Once you have a ‘solution’ you cease to be in a position to help clients find an alternative solution, you cease to be on the client’s side of the table.”
Ennis rejects the view that consultants go into the money management business to diversify their income because profits are not good enough in traditional consulting.
“There is no flaw in the pricing of independent consulting, we learned how to make that work, which was by a total commitment to servicing clients and putting their side first. We were earning retainers of $300,000 up to $800,000 a year, but it is hard work and you have to devote yourself to it.”
Ennis describes himself as a ‘libertine, laissez-faire guy’ and believes there has been an over-reaction in accusing the banks of larceny.
“It is a very competitive business, but in a satisfactory way. I wrote a piece a few years ago on product proliferation and that will continue, and I do think clients need to be smarter in how they spend their money, but the investment management business is doing fine.”
*Richard Ennis will continue his role as executive editor of the Financial Analysts Journal until the end of the year when he will retire from the investment industry all together. Under the tutor of Allison Fisher, 11-time world snooker champion, he is training to become a top pool player.
