Do Investment Consultants Pick Winners?

Investors hire advisors for a number of reasons, but the primary reason is usually that they want help choosing investments. Individuals typically rely on brokers or investment advisors. Institutions are served by “investment consultants” who specialize in helping them manage endowments and pension plans. Most investment consultants offer a range of services, including investment policy development, analytical modelling, strategic asset allocation and performance monitoring.

While investing in index mutual funds and ETF’s has gained in popularity (as evidenced by mutual fund inflows and ETF asset growth), the institutional world still believes that because of its prestige and size it can hire the best managers who can beat the indexes. Typically, investment consultants seek to differentiate themselves based on their ability to recommend the best investment managers to actually invest the funds. Because investment consultants do not take discretion over the institutional assets and the final decision is retained by each institution’s investment committee, consultants do not report the performance of the managers they recommend, and most investment committees do not try to determine in advance the track records of the investment consultants that they hire.

We look to academic research to help us understand markets and investment decisions. The articles published in the top journals typically include rigorous data analysis and undergo extensive peer review. An article1 in the October 2016 Journal of Finance caught our attention, entitled, “Picking Winners? Investment Consultants’ Recommendations of Fund Managers.”

The “Picking Winners?” authors gained access to a data base of investment consultant performance maintained by Greenwich Associates. Since 1999, Greenwich has recorded how many consultants recommend each actively managed US equity separate account. The authors find no evidence that investment consultant recommendations add value.

Some of the other interesting conclusions are as follows:

  • While consultants tend to recommend fund managers with good past performance, they also rely on “soft investment factors” such as manager investment philosophy, decision making process, and credentials of investment professionals.
  • Consultants tend to recommend larger investment managers (ie, ones with more assets under management), which as a group, underperform by 1.12% per year the smaller managers that were not recommended.
  • Surprisingly, the consultants are more likely to recommend managers with higher investment fees.
  • Consultant recommendations are linked to large inflows into the investment managers they recommend, implying that most institutions accept the recommendations of their consultants.

The authors note, “the cost of pursuing a strategy of picking actively managed funds, encouraged and guided by investment consultants, is considerable: the institutional funds in our sample charge, on average, 65 bps a year, which is far in excess of the cost of alternative index-related strategies.” They go on to point out that “consultants face a conflict of interest, as arguably they have a vested interest in complexity: proposing an actively managed U.S. equity strategy, which involves more due diligence, complexity, monitoring, switching, and therefore more consultancy work.”

We believe that investing is hard enough without adding the additional level of “active risk” to the process. Most returns are driven by good governance, asset allocation, firm control of expenses, and a focus on future goals as opposed to the quarterly performance of an active manager. Absent huge positive or negative investment returns (giving rise to suspicions of fraud), it is statistically impossible to draw conclusions from time horizons as short as 3 years, the typical time period used by many investment consultants for reaching a conclusion about the performance of an investment manager.

While “Picking Winners?” only covers domestic US equities and not any of the illiquid alternative investment assets, its conclusions are important. Starting in the 1960s when financial data first started becoming available for study (along with computers capable of crunching the numbers), academic studies have steadily debunked many investment premises long held by entrenched factors in the financial industry. The ability of investment consultants to select active US equity managers that outperform appears to be another in this ever lengthening list.


1JENKINSON, T., JONES, H. and MARTINEZ, J. V. (2016), Picking Winners? Investment Consultants’ Recommendations of Fund Managers. The Journal of Finance, 71: 2333–2370. doi:10.1111/jofi.12289