Pension funds and other large investors are throwing away billions of dollars a year on worthless advice from investment consultants, according to academic research. The funds recommended by consultants do no better than any other, and by some measures they underperform the wider market significantly, the research* found. On an equal-weighted basis, US equity funds recommended by consultants underperformed other funds by 1.1 per cent a year between 1999 and 2011, according to analysis of 29 consultancies accounting for more than 90 per cent of the market by a team from Oxford university’s Saïd Business School. “The enormous power wielded by consultants is not matched by their performance,” said Jose Martinez, one of the authors of the study. “In US equities, one of the largest asset classes, investment consultants as an industry appear to add no value in fund selection,” added co-author Howard Jones.According to the Oxford team, more than $13tn of US institutional money was advised on by consultants from 2011, with 82 per cent of public pension plan sponsors and half of corporate sponsors paying for advice. Worldwide, consultants advised on $25tn of assets.

If only one basis point of this was allocated for manager selection, this would amount to $2.5bn a year. An estimated $2tn of assets a year are also subject to “transition management”, often driven by consultants’ recommendations to hire and fire managers, incurring significant, and seemingly pointless, transaction costs.

In the US, the academics found consultants’ recommendations were highly influential. A fund recommended by many consultants could typically expect to see additional inflows of $2.4bn, “confirming survey data which reports that manager selection is one of the most highly valued services offered by consultants”, the paper said.

The Oxford team found these flows, and the fact that consultants tended to recommend larger funds in the first place, explained the underperformance of 1.1 per cent a year, as unwieldy funds suffer from diseconomies of scale.

However, they found “no evidence that the recommendations … enabled investors to outperform their benchmarks or generate alpha [market-beating returns]”.

The paper speculated institutional investors continued to rely on recommendations either because they want a “hand-holding service”, a “shield” to defend their decisions, or are “simply unaware how accurate or inaccurate” consultants’ calls are.

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http://bambooinnovator.com/2013/09/...t-consultants-according-to-academic-research/

Masters of the Universe indeed. More like holders of the most useless job ever.

Woops, I fail

Piecake said:

http://bambooinnovator.com/2013/09/...t-consultants-according-to-academic-research/

Masters of the Universe indeed. More like holders of the most useless job ever.

Woops, I fail

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Is this the John Bogle being proved correct yet again? Doesn't say what the funds actively managed fund were compared to.

mbmonk said:

Is this the John Bogle being proved correct yet again? Doesn't say what the funds they compared to.

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Basically, my impression it was the 'average' fund, but it could be the relevant index.

Whole paper is here

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2327042

Piecake said:

Basically, my impression it was the 'average' fund, but it could be the relevant index.

Whole paper is here

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2327042

Click to expand...

Thanks for the link

Moved thread to OT.

Just shows how foolish it is to attempt to beat the market, especially over medium and long terms (which to me are the only ones that matter). Once you've paid all those extra fees for consultants and what not, you're already sandbagged behind the overall market and have to do that much better to beat it. Which no one can do with consistency.

If only one basis point of this was allocated for manager selection, this would amount to $2.5bn a year. An estimated $2tn of assets a year are also subject to “transition management”, often driven by consultants’ recommendations to hire and fire managers, incurring significant, and seemingly pointless, transaction costs.

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It says pension funds and such, but I wonder how much of this feeding frenzy is from badly managed 401(k)'s. (I'll try to read the paper later.)

GhaleonEB said:

Moved thread to OT.

Just shows how foolish it is to attempt to beat the market, especially over medium and long terms (which to me are the only ones that matter). Once you've paid all those extra fees for consultants and what not, you're already sandbagged behind the overall market and have to do that much better to beat it. Which no one can do with consistency.


It says pension funds and such, but I wonder how much of this feeding frenzy is from badly managed 401(k)'s. (I'll try to read the paper later.)

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I don't think its 401ks. I think they are just talking about large institutional investors like Pensions and endowments who hire advisers for investment advice. They then follow that advice and buy the stock. So I think they are researching a more direct relationship - buyer and adviser - than the 401k - adviser - provider - buyer.

Unsurprising to those who have experience with finance and investment, but that's still a shocking number.

Once you get to a certain position in upper management (private or public sector) you can consistently fail upwards.

Piecake said:

I don't think its 401ks. I think they are just talking about large institutional investors like Pensions and endowments who hire advisers for investment advice. They then follow that advice and buy the stock. So I think they are researching a more direct relationship - buyer and adviser - than the 401k - adviser - provider - buyer.

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That's even more depressing than I thought, given the dollars lost. What a waste.

Underperforming by 1.1% actually isn't that bad, given the circumstances.

Sorry for how incredibly vague I can already feel that this is going to be, but remember that Wall Street whistleblower a year or two ago? The one that worked for (I think) J.P. Morgan, or maybe Goldman. The dude that, among many other things, said that these financial consultants would create financial instruments so complicated they required a Ph.D to understand and would push them onto these uninformed pension clients, all while referring to their clients as muppets because they just did whatever was recommended to them.

Anyways, I remember seeing an interview with him and one of his points was how they were supposed to be investing pension funds for (once again, I think) teachers in the state of Georgia, and the people that were supposed to be doing the investing were laughing about how hard they were fleecing the pension.

Underperforming the average by 1.1% isn't that bad when the people that you're paying to do the work for you are actively trying to rob you for as much as they can get away with. It almost sounds like these guys were holding back to maintain a semblance of credibility, considering the way they could really use those funds to enrich themselves.

And once again, sorry I don't have a single specific detail for what I referenced.

Edit: It was Greg Smith, Goldman Sachs, and last year

Burt said:

Underperforming by 1.1% actually isn't that bad, given the circumstances.

Sorry for how incredibly vague I can already feel that this is going to be, but remember that Wall Street whistleblower a year or two ago? The one that worked for (I think) J.P. Morgan, or maybe Goldman. The dude that, among many other things, said that these financial consultants would create financial instruments so complicated they required a Ph.D to understand and would push them onto these uninformed pension clients, all while referring to their clients as muppets because they just did whatever was recommended to them.

Anyways, I remember seeing an interview with him and one of his points was how they were supposed to be investing pension funds for (once again, I think) teachers in the state of Georgia, and the people that were supposed to be doing the investing were laughing about how hard they were fleecing the pension.

Underperforming the average by 1.1% isn't that bad when the people that you're paying to do the work for you are actively trying to rob you for as much as they can get away with. It almost sounds like these guys were holding back to maintain a semblance of credibility, considering the way they could really use those funds to enrich themselves.

And once again, sorry I don't have a single specific detail for what I referenced.

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1.1% might not sound bad, but it is really bad over time, especially when you take into take into account the consultant's fees and the expensive funds that those consultant's are likely telling these people to invest in. The consultants have a financial incentive to recommend expensive funds where they get a kick back.

So lets say they tell them to invest in a fund with a 1% expense ratio (no consultant would tell them to invest in an index fund), and a turnover rate of 100%, which would take on an additional 1%. That's 3% right there. We arent even considering other BS fees or the actual fund managers take (why the hell would you hire a fund manager to manage your fund who needs to pay consultants for advice anyways?)

Amount invested : $1,000,000
Annual return : 7.00%
Projected expense ratio is : 3.00%
What if the expense ratio is : 0.10%

Your investment returns over 30 years will be $4,158,297 more if the actual expense ratio is 2.9 percentage point(s) less than the projected.


Projected expense ratio
Actual expense ratio

3.00% 0.10%

Net market value after Difference
1 year $1,040,000 $1,069,000 $29,000
5 years $1,216,653 $1,396,010 $179,357
10 years $1,480,244 $1,948,844 $468,600
15 years $1,800,944 $2,720,606 $919,662
20 years $2,191,123 $3,797,993 $1,606,870
30 years $3,243,398 $7,401,695 $4,158,297

That's just pissing away money. What they do is hire me for a 100 grand a year and Ill invest it all in index funds and re-allocate every year or so. 100 grand a year for 10 minutes of work sounds ridiculous, i know, but I would be committing it on a MUCH more modest scale

Well then, I stand corrected and my understanding of Wall Street makes sense again.

So they're pretty much the parasites of parasites.