"Pay to Play" Scrutiny Has Consultants Rethinking Business Structures

As usual, a small group of money managers gained access to this exclusive event, held this year inBoston, as well as two others overseas, by paying WWW a yearly membership fee for the privilege of gaining up close and personal access time with consultants whose influence carries great sway with the plan sponsor community.   However, once they arrived, the attendance roster was anything but exclusive, according to a money manager, who preferred to remain anonymous.  

While some money managers had, in fact, paid a fee to attend, many more attended who had not.   When questioned about this spring’s US meeting, Tracey-Ann Preen, marketing consultant in Watson Wyatt’s London office, admitted that this year’s event in the United States had been “a different format” for Watson, but said she was “not in a position to say anything else about the GAS program.”

The money managers that paid to attend the U.S. GAS meeting fought to get their money back, says one who was in attendance, and who reports they have since been refunded.

Watson’s new approach to its consultant/money manager conference was perhaps influenced by recent inquires from the US Securities and Exchange Commission (SEC) into the relationship pension funds have with investment consulting firms (see  SEC Looks At Consultant, Pension Fund Relationship ).   The SEC sent letters to numerous pension consultants asking for information regarding the practices, compensation arrangements and disclosures in providing services to defined benefit and defined contribution plans.

While Watson appears to be reexamining its format in the United States, at the same time they have gone the other way with their European conference this past spring, once again having money managers pay to attend, according to unnamed sources.   Moreover, it was recently reported in the publication Global Money Management that Watson has changed its whole approach altogether, with the consultancy now saying it will no longer charge fund managers membership fees to be part of its GAS program, but rather will have managers pay a fee for each conference they attend.   The total charge for all three annual conferences will be approximately equal to the traditional membership fee, reports one money manager, but it will allow the choice to attend one or all three during the year, without paying for an unattended meeting.

WWW is not alone in rethinking its current approach.   Tim Gardner, the Global Head of Investment Consulting at Mercer Investment Consulting, said that the SEC inquiry had prompted Mercer to examine its own practices, admitting that Mercer is "pretty sensitized to the fact that there are potential conflicts in what we do.   It is not enough to be managing these conflicts; we need to be seen managing these conflicts."   For that reason, Gardnersays he thinks the company will set up a separate group to be responsible for managing such conflicts.

Both SIdes Now

The pay to play relationship is likened to a lawyer representing both sides of a case by Steve Holmes, president of Summit Strategies Group, an independent consulting group.   "Who's my client?" Holmes asks.   In these scenarios "money managers and plan sponsors are both clients and I run smack dab into conflict when trying to do the right thing for my client," he says.  

"We viewed ourselves as advocates for our plan sponsor clients," Holmes explains, on the decision to be an independent company.   "The more knowledgeable plan sponsors ask about relationships," Holmes adds.   Steve Cummings, president and CEO of Ennis Knupp, agrees, "Institutional Investors have always asked about it; [they] seem to be selecting independent firms."

Earlier this year, Wilshire Associates, a California investment advisory firm, reorganized the firm to avoid conflicts of interest, separating the consulting division and the funds management division, each with a new chief executive (see  Nesbitt Exits Wilshire Associates )   Watson Wyatt took the reorganization a step further in March, splitting its strategic consulting arm that serviced money managers from its core investment consulting business for institutional investors, creating a new Boston-based unit called Spring Consulting Group (see  Watson Wyatt Spins Off Spring Consulting ).   However, although the Spring Group has been moved off site, the 15 person group will still work very closely with Watson Wyatt.

When forming a new company, Cummings says it is "important to have separate stuff, facilities, managed by separate execs with no profit sharing, and no bonus pool at the end of the year.   You have to draw a hard line," he says.   "Honestly I don't think there is a way to eliminate the potential for conflicts," comments Cummings.  

Another way companies have tried to avoid the conflicts of interest is to sell affiliated broker dealers.   "A third party provider provides more attraction," say Cummings.   However, what some people don't ask the consultant when recommending their previously affiliated broker is whether the value the consultant received when selling the broker dealer is contingent on customers or clients remaining with that company.   In this way, Cummings says, "the company is technically sold but [the consultants] still have an interest in the company's success."

When looking at the pay to pay relationships, "I fret that consultants spend all this money to cover it up; it makes me think they think [independence] is the right way to do it too," says Holmes.

Modest Impact?

Although some changes are taking place in the investment consulting world during the SEC inquiry, the growing consensus seems to be that the SEC will not pass down any rulings, and that the investment consulting world will make changes as it sees fit.   "Frankly, the pay to play issue can sort itself out with the development of standards that govern these professional relationships because the very articulation of such standards will create both public and private enforcement for failure to follow them," says Dianne Shipione, trustee of the San Diego City Employees' Retirement System, who has been publicly critical of the relationships between consultants and money managers at the $3.2 billion fund and has voiced her concerns for years.   Shipione has also been vocally critical of the continuous, and intentional, under-funding of the city's pension fund that has gone on since 1996 and has been voted to continue until 2009.  

However, ultimately, "The solutions will have to come in standards applied industry wide," says Shipione.   There will need to be some relationships that are simply precluded and perhaps others that can be tolerated, but at a risk to the vendors, not the plan sponsors or System beneficiaries."