January 13, 2014 | Posted in The Hidden Cost of Poor Advice | By

Oxford Paper recommends that pension funds put their investment consultants under the same scrutiny as they themselves require from the investment managers that they analyse and recommend

A recent research paper from Said Business School, University of Oxford analyse the impact of investment consultants recommendations on US plan sponsor’s performance using 13 years of survey data provided by Greenwich Associates which has conducted surveys of investment consultants since 1988. The data analysed reflect the recommendations of US equity product by investment consultants for the period 1999-2011 during which period an average of 29 investment consultants answered the survey each year, reflecting a 91% share of the US consulting market. The recommendations used are the aggregated recommendations of all the consultants surveyed as investment consultants do not publicly disclose their own past recommendations to allow analysis of recommendations by individual consultants.

The findings of the study is interesting and suggests that a main impact of the recommendations is to drive significant fund flows into the recommended managers and that these managers then tend to underperform the wider market of available (equity) managers in which to invest.

The conclusion of the report is aligned with the recommendations of the Myners Report and discuss in detail the inconsistency that while fund managers testify to the rigor with which investment consultants scrutinize their performance and measure the effectiveness of their decisions, investment consultants themselves are shy of disclosing the sort of information which would allow pension funds, or any outsider, to measure their own performance. In an article in Financial Times on September 22, 2013 Mr Jones, one of the authors of the report highlight that “Since consultants do not disclose their individual recommendations, pension funds are allocating assets on advice the quality of which is impossible to judge” and contrasted the situation with the consultants scrutiny of fund managers.

If you want to know how CLERUS can help you measure the performance of your advisors and enable you to state full compliance with the Myners principle 4 on Performance Measurement please give us a call to discuss.

If you want to read the full research paper referred to herein please click here ssrn.com/abstract=2327042

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