In November 2025, a $4 billion public pension fund terminated three investment managers — all recommended by the same consulting firm, all underperforming their benchmarks by 150-300 basis points annually over five years. The consultants who recommended the managers were the same consultants hired to evaluate whether the managers should be fired. They recommended termination, collected a fee for the search that followed, and recommended three new managers. From the same approved list.
The pension board asked no questions. This is how the system works.
Investment consultants — the firms that advise pension funds, endowments, and foundations on manager selection — constitute one of the financial industry’s most powerful and least scrutinized gatekeepers. They influence an estimated $25 trillion in institutional assets globally, according to Thinking Ahead Institute data. And the evidence on whether they add value is damning.
The performance problem
The academic research is unambiguous. A landmark 2013 study by Tim Jenkinson, Howard Jones, and Jose Vicente Martinez — analyzing 29,000 investment management mandates advised by consultants — found that consultant-recommended products underperformed benchmarks by approximately 1.1% per year on a risk-adjusted basis. The underperformance was statistically significant and persistent across asset classes.
A follow-up analysis covering 2010-2020 confirmed the pattern held. Consultant recommendations didn’t just fail to add value — they actively destroyed it, steering institutional capital toward managers who subsequently underperformed.
The consultants’ defense has three parts. First, they argue that raw performance comparisons ignore risk management — that their recommended managers provide downside protection worth the return shortfall. Second, they claim their value lies in operational due diligence and governance, not manager selection per se. Third, they note that without consultants, many institutional investors would make even worse decisions on their own.
Each defense has some merit and significant holes. The risk-management claim is testable — and when researchers controlled for downside risk, the underperformance persisted. The operational due diligence argument is stronger; consultants have caught frauds and operational failures that performance-chasing allocators missed. But operational due diligence doesn’t require the full consultant business model. And the “we prevent worse decisions” defense sets a remarkably low bar for an industry charging billions in fees.
The conflict economy
The deeper problem is structural. The consultant business model is riddled with conflicts that would be illegal in most other fiduciary contexts.
Consider the standard arrangement: a pension fund hires a consultant to recommend investment managers. The consultant maintains a “buy list” of approved managers. Managers pay to attend the consultant’s conferences. Managers sponsor the consultant’s research. Some consultants operate affiliated asset management divisions that compete with the independent managers they recommend.
The most corrosive conflict involves “implemented consulting” — where the consultant not only advises but also executes. Under this model, pioneered by firms like Mercer and Russell Investments, the consultant takes discretionary control of manager selection and portfolio construction. The consultant is now both advisor and manager, collecting fees at both levels. The pension board that hired a consultant for independent advice has instead hired an outsourced CIO with every incentive to recommend complexity over simplicity.
Willis Towers Watson, Aon, Mercer, and Cambridge Associates dominate the industry. Their combined influence over institutional asset allocation is difficult to overstate. When a consultant adds a manager to its buy list, that manager can expect billions in inflows from consultant-advised clients. When a manager is removed, outflows follow. This gatekeeping power — exercised with minimal regulatory oversight — shapes the entire active management industry.
The SEC has examined consultant conflicts but stopped short of substantive regulation. Unlike investment advisers, consultants operating in a non-discretionary advisory capacity face limited fiduciary obligations. The pension fund, not the consultant, bears legal responsibility for investment decisions — even when those decisions were effectively made by the consultant’s recommendation.
Why the system persists
If consultants destroy value, why do institutional investors keep hiring them? The answer reveals uncomfortable truths about institutional governance.
First, liability shielding. A pension board that follows consultant recommendations has a defensible process, even if the outcomes are poor. “We followed our consultant’s advice” is a powerful defense in fiduciary litigation. The consultant functions as an insurance policy against blame, not as a source of alpha.
Second, resource constraints. Most pension boards meet quarterly. Their members are political appointees, union representatives, and ex-officio officials — not investment professionals. Evaluating 50 emerging market debt managers requires analytical infrastructure that a part-time board cannot build. The consultant fills a genuine capability gap.
Third, career risk. The staff investment officer who hires a consultant and underperforms keeps their job — the consultant is blamed. The CIO who fires the consultant, picks managers independently, and underperforms gets fired. The incentive structure rewards outsourcing responsibility, not maximizing returns.
These are rational responses to institutional constraints. But they mean the consultant industry’s revenues depend on governance dysfunction, not investment skill. That is a precarious foundation.
The counterargument: consultants do add value somewhere
The honest defense of consultants focuses on what the performance studies miss. Manager selection is only one function. Consultants also provide asset-liability modeling, spending policy analysis, governance structuring, and — critically — the behavioral discipline to prevent panic selling during drawdowns.
There is evidence that consultant-advised institutions rebalance more consistently and chase performance less aggressively than non-advised peers. A 2022 paper found that pension funds with consultants maintained strategic asset allocations through the 2020 market crash at higher rates than those without. That discipline has real economic value, even if it doesn’t show up in manager selection alpha.
The strongest version of the pro-consultant case reframes the question. Don’t ask whether consultants pick winning managers — ask whether institutions would do worse without them. For the typical public pension board, the answer is almost certainly yes. The alternative to a flawed consultant is not a brilliant internal team. It is a politically appointed board making investment decisions by gut feel.
What would better look like
Three reforms would improve the system without dismantling it. First, mandatory disclosure of all consultant-manager financial relationships — conference sponsorships, research payments, affiliated business revenues — in a standardized format. Sunlight won’t eliminate conflicts, but it would let pension boards assess them.
Second, separation of advisory and implementation. A consultant should not both recommend managers and manage the portfolio. The implemented consulting model combines the worst of both worlds: the fees of active management with the accountability of nobody.
Third, performance-based fee structures. If consultants claim to add value through manager selection, a portion of their fees should be contingent on the performance of recommended managers versus benchmarks. The industry’s near-universal reliance on asset-based or retainer fees — paid regardless of outcomes — removes any financial incentive to recommend outperformers.
None of these reforms are likely without regulatory pressure. The consultant lobby is sophisticated, the pension boards are conflicted, and the status quo serves everyone except the beneficiaries whose retirements depend on the returns.
The $4 billion pension fund terminated its three managers in November 2025. The consultant recommended three replacements from the same buy list. The board approved them unanimously. Somewhere, an academic is already collecting the data for the next study showing these managers will underperform too.
The consultant industrial complex doesn’t need to be right. It just needs to be hired.
The category-defining name in investment manager research — managerresearch.com — is currently available for acquisition by the firm positioned to own this space.
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