Mercer Quits US Public DB Investment Consulting

Earlier this week, Benefits Canada reported that Mercer quits public U.S. DB investment consulting (HT: Johnny and Dave):

Just as plan sponsors are moving away from defined benefit (DB) pensions, so too is global consultant Mercer.

Mercer told its 24 public U.S. DB clients that it will no longer be offering investment consulting services. Charles Salmans, partner and director of global public relations with Mercer said the company is working on transition plans for these organizations. “We want the transition as smooth as possible.”

A statement released by the company said, “We will be working with our defined benefit clients to help ensure a transition period so that they can identify another investment consulting firm that can perform defined benefit investment consulting advisory services."

The statement also said that this decision was made "after a comprehensive review of our business and in light of changes in the public fund marketplace.”

Salman indicated that the decision is not directly related to either of the lawsuits that Mercer has settled in the last year and a half, regarding actuarial services. In both of those cases Mercer denied liability.

“We stand behind the professionalism and integrity of our investment consulting work for the public sector. Having said that, we are always evaluating our business and making prudent business decisions, and risk is certainly one factor that we consider in these decisions,” the company said.

Mercer's private clients and those in Canada need not fret. The company will continue to offer investment consulting services to plans outside of the U.S. and to private DB plans in the U.S.

I wonder if this decision had anything to do with Mercer's little Alaska problem where the Alaska Retirement Management Board accused Mercer of underreporting by more than $2.8 billion the contributions required to fund the plans.

I got to be honest, I'm not a big fan of investment consultants. I think a lot of them are peddling terrible advice and they have no skin in the game. Unfortunately, in the US, they act as gatekeepers for many of the large public retirement plans. You can't get money from any large plan unless their investment consultant approves it.

And why do the boards of these plans use them? Simple, to cover their asses in case something goes wrong. It's cover your ass politics everywhere. That's the problem in the US. Nobody wants to take responsibility and be accountable for investment decisions taken at these large public pension funds.

There are some excellent investment consultants, but they're rare. Usually they're 100% independent and they do take care to understand their clients' needs before shoving them in some fund that pays them a percentage of assets under management (always ask why they're recommending some fund and how they get paid -- flat fee or fee attached to assets the funds receive).

But I will tell you that most consultants shove their clients in the same "brand name" funds. I recently ran across Martin Gagnon, Co-Chief Executive Officer at Innocap, a Montreal based fund of funds which offers hedge fund managed account solutions, using a conservative approach to hedge fund investing with a strong emphasis on transparency, liquidity, asset control and risk management.

Martin told me that the top five managed accounts platforms around the world account for over 80% of total managed account hedge fund assets. It's all about being in the brand names, which is stupid, because you'll get better service with smaller groups like Innocap than you will with the larger players.

But investment consultants are covering themselves too, which is why most of them recommend brand names, regardless of their clients' needs. Like I said, with rare exceptions, I'm not a big fan of investment consultants. If they were that good, they'd be managing money instead of making recommendations and charging a mint peddling mediocre advice. Let's hope more of them follow Mercer's lead and get out of consulting US public DB plans.

***Feedback***

An independent consultant who I respect sent me this feedback, which I share here:

Interesting conclusion to your article.

On one hand you think Board Governance should be higher but what are they to do if they do not fully understand the issues presented. We work with a lot of boards who do not understand their managers or their portfolios. We explain it to them in terms they understand and help them to understand the issues.

I know you gave a small nod to independents but I still think your brush was too broad.