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When
it comes to the hiring of investment consultants and advisors, pricing
structures often play a large part in the final decision. In addition
to the costs assessed for investment consulting services, determining
which types of investments to include as a part of the portfolio can be
daunting for Board members. Costs for many of the products offered are
not completely clear or disclosed. Unfortunately, neither are many of
the hidden fee structures, conflicts of interest,
and behind-the-scenes deals arranged between the consultant and
investment managers.
The Traditional Industry Problem
In a marketplace where it is now known that some of the largest and
best known investment consulting firms have abused client trust by not
disclosing conflicts of interest and amounts of revenue received from
related brokerage arrangements or relationships with the managers they
have been recommending, trustees are still left with the responsibility
of choosing an adviser.
Unfortunately for most Plans, investment consulting
services have become largely "commoditized" – virtually all traditional
investment consulting firms tend to do the same things in largely the
same ways. As a result, the pricing of their services has now come to
reflect this new reality, with significant price competition driving
flat fees lower and lower. Price consequently becomes a large factor
during the decision-making process of hiring an adviser. "Out of pocket
cost" is only one of many elements to consider – But not the most
important one. As with any product you decide to purchase, however,
when does the quality of the product you are purchasing matter?
Much more important than
"out of pocket cost" is –
Cost Adjusted Performance.
Ask These Questions:
- Why
should fiduciary Boards pay investment consultants for performance
below the level they could have achieved by merely investing in passive
index funds?
- What are the
Opportunity Costs (the performance gaps) we missed? "Opportunity Costs"
could in fact be the largest and most significant of all costs your
plan experiences; one cost of which you may never be aware.
How
much would you pay for a process that provides a different result ...
a process that is available nowhere else?
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