My previous article examined three themes—investment consultant expertise, service models/service delivery and retention of professional staff—in the context of questions to include when creating a request for proposal (RFP) for institutional investment consulting services.

This follow-up article will explore questions relating to conflicts of interest at consulting firms, unique capabilities that may be available to clients and compensation of consulting firms.

4. What additional services does your firm, or a related entity, provide? Where these services could create a conflict of interest (perceived or otherwise), how do you manage this to ensure that your firm is able to act in the best interest of the client?

You will want to ensure that there are no lines of business within the firm, or alliances with other firms, that could possibly create a conflict of interest or impair the ability to offer unbiased advice. It is often surprising just how commonplace these conflicts can be. Though not a complete list, some examples of potential conflicts could include the following:

  • Providing advice to clients regarding potential investment management products while also offering investment management products.
  • Providing investment management search to clients but presenting only those investment management firms that have paid the consulting firm to be part of the long list, have paid to be in the consultant database or have paid to be evaluated by the consulting firm.
  • Providing investment search services while also providing paid consulting advice to investment management clients regarding marketing or products.
  • Offering advice on alternative and traditional investment products while also providing brokerage/dealer services and/or underwriting securities and private placements.
  • Accepting soft dollars (payment for services through commission revenue) from investment transactions as payment for services.
  • Allowing potential candidate firms to underwrite the costs of hosting client conferences.
  • Providing plan member recordkeeping search services to clients while also offering recordkeeping services.

Consulting firms that have no ties or affiliations with investment management firms or other financial institutions and that do not offer services that could conflict with their consulting business are best positioned to provide a client with unbiased advice.

However, where potential conflicts exist as part of the consulting firm’s business model, you, as a client and fiduciary, will need to understand what those conflicts might be and how (or to what extent) they are mitigated through internal controls.

In a large consulting organization where potential conflicts are present, you will want to understand what part of the consultant’s compensation is related to the performance of the investment consulting division versus the overall organization’s profitability. Compensation related to the organization’s overall profitability opens the door to favouring in-house products and services.

5. What unique capabilities and deliverables can we expect from your firm? How will these be of benefit? What specialized tools and research does your firm provide, and how do these benefit your clients?

Most firms that have demonstrated adequate expertise in their response to Question 1 from Part 1 (What is your firm’s and your consultant’s experience working with other similar institutional investors?) are going to be able to offer the types of services required by most institutions. The dilemma then becomes how to move from basic qualifying criteria to selecting the firms that are appropriate to work with. The questions relating to service models and professional staff retention (also in Part 1) will assist in this regard, but so will asking what unique capabilities and deliverables you may have access to as a client of the consultant.

In short, you will want to see what tools and services are available and how they will assist you, as a busy fiduciary, to make better decisions and monitor your investments. Leading consulting firms have the ability to take the complex intricacies of investing and distill them into a clear and concise format that supports understanding and decision-making (this is also related to Question 2, Describe your service model, in Part 1). Firms that are not completely committed to their investment consulting practice will have few specialized tools and very little value-added research and services.

Some services that may make your job easier could include the following:

  • organizing agendas for meetings;
  • organizing all presenters to the committee;
  • taking minutes or reviewing draft minutes; and
  • creating tools, such as a fiduciary portal, to help manage the many moving pieces involved in the investment program and to provide an archive of materials for current and future decision-makers.

These value-added services can help move the evaluation process beyond the “many flavours of vanilla” of traditional investment consulting, so that decision-makers do not fall back on deciding based on price alone. (However, as we will explore in the last question, it can be difficult in some cases to know how much you will pay your consultant in advance.)

6. How is your firm compensated by your clients and others (all sources, monetary or otherwise)?

There are various ways a consulting firm can be paid (i.e., hourly fee, retainer, on a project basis, commissioned selling or directed trading commissions). Hourly fees offer the most flexibility, but it can be difficult to determine in advance how much consulting services will cost. In the wrong hands, a retainer structure can lead to consultant complacency rather than a proactive approach.

You will also want to monitor the total fees generated and ensure that they are appropriate based on the value add provided by the consultant and compared with industry norms. Relating back to Question 4, you will want to understand the level of transparency of fees and how this relates to some of the potential conflicts of interest at the consulting firm.

Confirm if access to specialized tools and research is part of the consulting package or if it is something that needs to be requested and paid for separately.

Lastly, be aware of fee arrangements that may not be in your best interest (e.g., an arrangement that motivates a consultant to recommend work that may or may not be necessary in order to generate extra revenue).

While the six questions outlined in these two articles are certainly not exhaustive, they should form the foundation for any investment consulting RFP. Taken together, they may help institutional investors differentiate among the options and find a consulting relationship that suits their needs.

Ryan Kuruliak is a Toronto-based vice-president with Proteus, an investment and governance specialty firm. He has more than 14 years experience in the pension and investment consulting industry.

These are the views of the author and not necessarily those of Benefits Canada.

Copyright © 2020 Transcontinental Media G.P. Originally published on

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