How consultants can stand out from the crowd

October 9, 2018

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Vanguard Institutional Advisor's Alpha™: Quantifying the Value of a Consultant is a new white paper that addresses the challenges and opportunities institutional consultants face today. While the role consultants play is vital to their clients' success, the landscape is changing rapidly.

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Investment consultants helped guide roughly 65% of net new cash flows for institutional investors in 2016.¹ Yet, industry consolidation and rising client expectations continue to add to the pressures consultants face.

A 2017 Cerulli report found that 68% of consultants believe that the inability to differentiate themselves is a top concern. That was followed by 67% who cite new competition from the outsourced CIO space and 65% who claim finding new growth opportunities are moderate to major threats.²

From these insights, we can conclude that the majority of consultants may be looking for ways to add more value and stand out from the crowd.

Control what you can

Given the Cerulli findings, Vanguard believes institutional consultants have a real opportunity to increase the alpha they offer by following a straightforward, value-added framework. The idea is to demonstrate the value consultants deliver to client relationships by focusing on four critical areas that are within their control:

Develop a firm grasp of fiduciary considerations

Fiduciary law and regulatory compliance is an important area for every consultant to master. Fiduciary considerations cover a wide-ranging and increasingly complex environment where clients—whether they operate in the defined benefit (DB), defined contribution (DC), or nonprofit space—look to their most trusted advisors for guidance.

Consultants must have a deep understanding of laws governing their particular client base. What's more, they should be adept at sharing their knowledge with clients by applying best practices and conducting fiduciary training. The most effective consultants will also be forward-looking.

Increased regulation has led to greater enforcement actions and litigation in recent years. So the best consultants must balance compliance with today's fiduciary standard, alongside regulatory issues and litigation trends. By doing so, they can position their clients—and their own consulting business—for the best chance of success.

Craft an airtight investment policy statement

In our opinion, a detailed and carefully written investment policy statement (IPS) is one of the most useful tools in the consultant toolbox.

While most institutions may create an IPS, many fail to follow it for a number of reasons. Sometimes the document may represent a plan in need of improvement. In other cases, the IPS might not be comprehensive enough to emphasize the detailed processes, realistic goals, and clear articulation of when the policy should be reviewed or modified. It represents a simple idea that is not always so easy to follow.

Take your investment policy statement to the highest level

Investment policy statement image

Source: Vanguard.

By helping clients create and adhere to a comprehensive IPS, consultants have the potential to add significant value to both the client relationship and ultimately their clients' investment success. The most critical elements to cover in the IPS include the portfolio objective, asset allocation policy, risk management framework, manager search and oversight process, and committee governance procedures.

We suggest consultants view the IPS as an essential guide for decision-making. Institutional investors can often fall victim to the same behavioral missteps as individual investors. After all, it's a natural human impulse to chase performance and time markets. An effective IPS can help consultants keep their clients grounded during times of uncertainty, volatility, and market extremes.

Design a thoughtful, carefully monitored plan

Plan design and monitoring is an area that applies specifically to DC consultants. It's also where they have perhaps the greatest opportunity to add value for their plan sponsor clients and, ultimately, plan participants.

Here it's also important to develop a deep understanding of participant behavior. Consultants can leverage this knowledge to increase participation rates, savings rates, and qualified default investment alternative (QDIA) adoption. Effective plan design can lead to substantially improved outcomes for plan participants.

Three steps toward better participant outcomes

Three Steps image

Source: Vanguard.

The final step in the process involves plan benchmarking. This should be an ongoing effort where consultants capture and analyze plan metrics and monitor plan effectiveness. One way to monitor plan effectiveness is to measure three fundamental factors: participation rates, total savings rates, and investment decisions. Consultants can use this method to assess how effective a DC plan is at helping participants save for retirement.

Create a sound investment strategy

Asset allocation remains the foundation of investment strategy. It's been this way since 1986 when a seminal study found that the asset allocation decision explains about 90% of both the variability of return and the volatility within a nontactical, broadly diversified investment portfolio.³

A 2017 Vanguard research paper confirmed those original results. Given the consistency and magnitude of these findings, we think consultants should let strategic asset allocation guide their investment strategy.⁴

In the case of nonprofit clients, once their goals and unique profile are considered, we believe the best way forward is to use broadly diversified, low-cost portfolios as a benchmark to select and validate an optimal strategic asset allocation. A focus on lower costs, whether using active or passive investment vehicles, is also prudent.

It's a different situation for defined benefit consultants. Their work is dictated by the funded status and portfolio objective of a given plan where they maintain a dynamic balance between return-seeking and liability-hedging assets. Here consultants must use a liability-driven investment approach that encompasses liability matching and a derisking glide path to maximize funded status and minimize funded status volatility.

Give your clients the best chance of success

We believe that consultants who follow the Vanguard Institutional Advisor's Alpha framework stand the best chance of helping their clients achieve investment success. At the same time, they can also add significant value to their practice.

We recognize that many consultants to DB, DC, and nonprofit clients already apply these best practices to their client relationships. Others may see new opportunities to add value in certain areas.

We hope every consultant finds this framework helpful, ultimately using it as an opportunity to rethink client engagement based on the nature of the services and benefits made available to each client type. Of course, the actual amount of value added to each relationship may vary significantly, depending on individual client circumstances.

Vanguard is here to help

When you partner with Vanguard, you'll find that our interests are aligned with our clients' interests. We're here to help you and our mutual clients succeed. With no outside investors or stockholders looking to maximize profit, we focus on what matters most—you and your clients.

What's more, you can leverage Vanguard's reputation and recognition to help reinforce the value you provide.

¹ Cerulli Associates, 2017. The Cerulli Report: North American Institutional Markets 2017.
² Cerulli Associates, 2017c. The Cerulli Report: U.S. Investment Consultants 2017: Strategies for Engaging Partners, Competitors, and Gatekeepers.
² Brinson, Gary P., L. Randolph Hood, and Gilbert L. Beebower, 1986. "Determinants of portfolio performance." Financial Analysts Journal.
⁴ Scott, Brian J., James Balsamo, Kelly N. McShane, Christos Tasopoulos, 2017. The global case for strategic asset allocation and an examination of home bias. Valley Forge, Pa.: The Vanguard Group.


  • All investing is subject to risk, including the possible loss of the money you invest. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income. Past performance is no guarantee of future returns.
  • Diversification does not ensure a profit or protect against a loss.