In an October 1, 2013 NY Times article Andrew Ross Sorkin writes about the investment consultants that are hired by U.S. pensions funds. His focus is the lack of transparency with respect to the performance of these consultants.
While anyone hiring an investment consultant should want to know the quality of the advice that the consultant has given in the past, what is even more important is how does the consultant makes his/her money.
With respect to pension funds, investment consultants primarily provide advice on asset allocation and help in the selection, monitoring, and termination of investment managers. Unfortunately these consultants earn revenues not only from pension funds but also from investment managers that the consultants are hired to monitor.
Years ago I told my young son the story of the emperor's new clothes. It made no sense to him that people at court would not have told the emperor about the scam. Why did it fall to the child to point out the obvious?
The entire pension fund industry knows that the investment consultant structure is broken but as in the story there is shortage of courage among the adults. It is obvious that the pension funds should insist that investment consultants earn only revenue from pension funds and never anything from the investment managers that they are required to critique. Of course, pension funds would have to pay the investment consultants a lot more money. It would, however, be money well spent.
As further background on this structural flaw refer to this old posting I wrote in 2010. If anything, the situation has gotten worse since then.
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