Comment by Greg Bright
An interesting new investment consulting model was presented in Australia last week: that of ‘bfinance’ of the UK, which has had a successful track record of running manager searches in Europe whereby the managers pay for the privilege of being involved. The client pension fund gets the work for free.
Can you imagine JANA, Frontier, Mercer, Towers Watson or Russell doing this? But anyway, let’s run the idea up the flagpole. As everyone knows, investment consulting is a very valuable component of Australia’s retirement savings system but it’s not well remunerated. Maybe a different model is worth considering.
bfinance is a privately owned media company on behalf of which their executives did a series of presentations in Australia last week. They presented in Melbourne last Thursday and Friday after earlier meetings in Sydney. A spokesperson said the Australian funds with which they met were interested in the concept. They would be back next April or May for follow-ups. So, what is the concept?
bfinance will contract with a pension fund, multi-manager or even traditional asset consultant to conduct a manager search for a particular mandate. It will do this for ‘free’. bfinance then advertises and does direct marketing, as well as contacting its previously involved managers, for a tender to appropriate managers, which it also researches. The process is pretty much the same as that undertaken by traditional asset consultants to this point. But then those who make it to the short-list are asked to enter a contract to provide a certain percentage of their first-year management fee – normally about one third – to bfinance if they are successful in winning the mandate, as a one-off payment.
So, we are actually talking big money compared with that which a traditional asset consultant on a retainer-based relationship would get. Let’s say, 10bps of a 30bps fee for an equities mandate of $500 million – that is, $500,000. A typical retainer-based annual fee from a big asset consulting firm, with a lot more resources than bfinance, would be less than this. bfinance has 70 employees.
The company, which was launched in 1999 at the height of the dot-com boom, has done about 650 manager searches on behalf of institutional clients in the past 14 years, the spokesperson said. Another media company, Asset International, also tried to do a similar thing in the dot-com boom. It launched an online tender system for pension funds in the the US and got QIC, in Australia (which was looking for a new US manager) as its first client. Asset International eventually ran out of money, for that venture, and returned to its main game of magazines, research and newsletters.
Interestingly, the bfinance spokesperson also said that that, under a bfinance tender, the universe of managers looked at would be “five fold” that of a traditional asset consultant going through its ‘rated’ lists. He was responding to the question as to whether the business model would constrain the number of eligible managers.
The implication, then, is that traditional asset consultants have already reduced their universe to a favoured few, developed from research and meetings. And then, in any particular search, that list may be further reduced because of capacity or conflict-of-interest issues.
Maybe getting a third of the managers’ first-year fee, rather than charging the super fund, is not such a bad idea after all.