Mercer’s acquisition of US-based Hammond Associates marks the continued trend of a new consulting environment that raises the question of whether boutique firms can survive. Amanda White spoke to Mercer’s US investment consulting leader, Jeff Schutes, about why clients’ demand for deeper resources and knowledge is driving the consolidation, and why large firms are rejecting the risks of the public pension domain.
For the most part it’s pretty much standard M&A reasoning that’s driving consolidation in the US investment consulting market. Larger players are buying because of a gap in market share according to geography or service offering; and smaller players have reached capacity in their ability to extend their service to the increasingly complex demands of clients.
Indeed, Mercer’s US investment consulting leader, Jeff Schutes, believes the trend in the US for smaller boutique consulting firms to be swallowed by the larger players is being driven by corporate fund and endowment clients’ need for firms with a global presence and deeper resources and knowledge.
“Smaller boutique-ish firms have done well in the past 25 years, but they haven’t been able to grow, they can’t continue to grow, so the trend will continue, we will continue to see consolidation,” he says.
In response to clients’ demands, investment consulting is a beast undergoing change. The services, skills and resources required to meet those demands are not singular in focus, but require a more holistic approach to a client’s investments, liabilities and so funding and strategy.
“In the corporate defined-benefit space in the US, the needs of the plan sponsor are so sophisticated,” Schutes says. “Consultants now need investment banking skills, actuarial and strategic advice type skills. The specialist skills needed in consulting now are more strategic, a combination of actuarial and investment advice. It’s financial consulting to the balance sheet, to control volatility and de-risk.”
In addition within investments he says clients are demanding more specialisation so consultants need resources, and so capital, to invest in their teams.
Mercer, for instance has specialty teams for responsible investments, and operational risk assessment; and now with the acquisition of Hammond Associates a dedicated endowment and foundation team.
“In buying Hammond our first priority was to grow market share and expand our revenue stream into the endowment and foundation market,” he says. “We didn’t have much coverage in that space, and it is a growing area that is hard to grow organically.”
From 2005 to 2009 endowment and foundation funds using investment consulting services grew at a compound rate of 10 per cent in the US, compared to 5 per cent annual growth for both corporate and public funds. Hammond, which was founded in 1985 in St Louis by chief executive Dennis Hammond, has more than 200 clients and 120 investment professionals.
Schutes says Mercer will leave Hammond, which is the third-largest consulting firm in the US specialising in this area, as a separate specialised unit.
“They’ll become our centre of excellence for endowments and foundations, they have the client-facing skills and they will continue to manage as they have been.”
In addition, Hammond has specialist skills in alternatives (see for example research here), which Schutes says has helped “fast-track” Mercer’s resources in that area.
But while the trend for consolidation continues – demonstrated also with July’s acquisition of Ennis Knupp by Hewitt Associates – the larger players are also drawing a line in the sand with regard to whom they service.
Towers Watson, for instance, does not service US public pension plans, and now Mercer has also demonstrated they will exit this part of the market.
“Mercer is in a position of luxury where we can sit back and evaluate our business,” Schutes says. “Based on the risk profile we decided to exit the public fund defined-benefit business. Frankly, the risk profile is deteriorating, their funding status is getting worse and the fiduciary risk is too high. Under US law as an SEC investment advisor we are not allowed to have limited liability, so contract terms are not favourable to the consultant.”
This is a difficult situation for public pension funds in the US that probably need good advice more than ever before.
“The two firms with the most expertise are not willing to participate. At a certain point there may need to be legislation addressing the risk,” he says.