The Contested Role of Investment Consultants: Ambiguity, Contract, and Innovation in Financial Institutions

Abstract

The global financial crisis and its aftermath put into sharp relief the structure and performance of the global financial services industry. Questions have been raised as to what intermediaries individually and collectively add to the production of investment returns and social welfare in general. In this paper, we look at the roles and responsibilities of investment consultants in relation to asset owners of various types, including pension funds, sovereign wealth funds, endowments, and family offices. Focusing upon the relationship between investment consultants and clients, it is suggested that this relationship is characterised by ambiguity; there is a lack of clarity as to the precise roles and responsibilities of both parties. This argument is developed by reference to a set of three prototypical pension funds, distinguished by asset size — a proxy for capabilities and resources. It is argued that ambiguity can be of benefit to both parties. But ambiguity can impose costs upon clients, unable or unwilling to remake their relationships with intermediaries. Our paper highlights instances of innovation, and the ways in which these relationships have been redrawn so as to respond to the challenges of operating in global financial markets.