The Definition of Investment Consulting including Typology and Segmentation
According to Steele ‘consulting’ is ”any form of providing help on the
content, process, or structure of a task or series of tasks, where the
consultant is not actually responsible for doing the task itself but is
helping those who are.”[1]
A commission of experts in the USA has defined ‘management consulting’ as ”an independent
and objective advisory service provided by qualified persons to clients in
order to help them identify and analyze management problems or opportunities.
Management consultants also recommend solutions or suggested actions with
respect to these issues and help, when requested, in their implementation.”[2]
Kubr combines – in collaboration with an international circle of authors – the contents of these
two definitions and concludes: ”Management consulting is an independent
professional advisory service assisting managers and organizations to achieve
organizational purposes and objectives by solving management and business
problems, identifying and seizing new opportunities, enhancing learning and
implementing changes.”[3]
The term ‘management consultant’ can be defined as “a universal term for any
professional who provides assistance to others, usually for a fee.”[4]
All four definitions include the essence on which consulting is based: independent
assistance with problem solving.[5]
The existence of a problem is, thus, constitutive for a consulting demand.[6]
Unlike the
expert who solves a problem on his own, the work of a consultant is
characterized by interaction with the client in solving the problem.[7]
This interaction is reflected, on the one hand, in the consultant’s
understanding of the client’s affairs and, on the other hand, in the
collaboration between consultant and client.
Moreover, the criterion of specialization in the expert sense is not sufficient since
independence is another constitutive element of an external consultant:
“Outside advisors brought specialized knowledge, not otherwise available, into
organizations that faced problems that internal staff members could not easily
resolve,” but “it is not their specialization that sets consultants apart but
their continuing independence from the corporation.”[8]
In 1982, Turner presented a hierarchy of eight levels that illustrate the
consulting tasks in a differentiated manner thereby contributing to an even
more detailed definition:[9]
- Information conveyance
- Diagnosis of current state to redefine the problem
- Problem resolution
- Recommendations for action based on the diagnosis
- Implementation support
- Development of a joint understanding and commitment
- Support for organizational learning
- Permanent improvement of organizational effectiveness
According
to Fink, management consultants ‘make’ management concepts. They invent the
basic principles, design methods and instruments, and, that way, solve the
problems of their clients.[10]
Insofar, also knowledge transfer is, besides problem solving, a dominant
function of consulting[11];
thus, knowledge is a central parameter in the definition of consulting.[12]
Besides
law firms, auditing companies, and also investment banks, investment
consultants are among ‘professional service firms’ that perform particularly
knowledge-driven services.[13]
Other functions that can be classified as latent are:
- Political function, i.e., use of a consultant to assert unshakeable notions and already
a-priori made decisions.[14]
- Enforcement function, i.e., use of a consultant to support the achievement of a consensus in case of still variable notions and open decisions.
- Legitimation function, i.e., use of a consultant to block or at least reduce attribution of unfavorable or unpleasant developments to the management in charge.[15]
- Interpretation function, i.e., use of a consultant as (external) conversation and sparring partner to obtain new insights and perspectives through contemplation.
Regarding the
political function of consultants, McKenna states that “administrators have
employed outside advisors for thousands of years, but their counsel has
traditionally been political, not commercial.“[16]
For a deeper understanding of consulting in general, it is advisable to take a look
at the roles.[17]
Since it is not expedient or even possible in the framework of this study to enumerate all the possible roles of consultants as “the list of roles is
endless,”[18]
the following figure offers an integrative observation of roles, functions, and
tasks of consultants.[19]
Fig. 1: Tasks, functions, and roles of consultants.
[20]
The term ‘investment consultant’ is not a protected professional title. This is also the
reason for the lack of any official or generally recognized, clear and
unequivocal definition. The U.S. Securities and Exchange Commission (SEC)
subsumes investment consultants under the term ‘investment advisers:’ “A person
that advises as to the selection or retention of an investment manager is
considered an investment adviser”[21].
Yet, according to Mohe et al. the lack of a profession in the socio-professional
sense […] does not necessarily [mean] the leave-taking from notions of
professionalism as defined in a knowledge-sociological sense.[22]
Literally, the term ‘investment consultant’ refers to a consultant in matters of the asset
side of a balance sheet. Consultants who are solely specialized in the analysis
of the liability side and in actuarial consulting are, strictly speaking,
called ‘pension consultants.’ The meaning, however, covers in fact a much wider
scope than that.
If the term ‘management’ is replaced by ‘investment’, the above-mentioned definitions of
management consulting largely provide a fitting template for a practice-oriented
real definition[23]
of investment consulting:
Investment consulting is
an independent professional consulting service,
which interactively – directly and as an intermediary –
supports institutional investors and their decision-makers
through solving investment problems
to optimally achieve their financial objects and goals
For systematic specification of the roles of investment consultants, the
classification of the roles of management consultants according to Schein will
be applied.[24]
Investment consultants’ activities, as well as value-creation fields
respectively, will be classified along those of management consultants and will
be dealt with extensively and in a detailed manner in the following chapters.
In the framework of the ‘physician-patient relationship’ according to Schein, a
customized solution is recommended following a comprehensive and detailed
analysis of the client’s situation. In investment consulting, the following
value creation steps must be attributed to that class: definition of investment
policy, asset-liability analysis, and strategic asset allocation. With the
‘purchase of expertise’ according to Schein, the client makes use of the
specific knowledge and expertise of the consultant in this area: These include
such services as manager selection, allocation, and monitoring. In ‘process
consulting’ according to Schein, consultants assist with their methodological
competences, among them, services implementation as well as investment
controlling.[25]
The essence of investment consultants’ classic roles – i.e., in the narrow sense[26]
– is that “the role of the investment consultant is to manage, not to make
investment decisions.”[27]
In the same way the general roles of management consultants also apply to
investment consultants, as do, by nature, the general functions. Investment
consultant-specific functions pertaining to investment-related questions are
the quality assurance function and the intermediation function.
Through professional ‘screening’ as well as due diligence in the framework of manager
selection, investment consultants reduce an information asymmetry that
basically exists at all times, thereby contributing to an increase and
respectively assurance of their clients’ quality of decisions. The
intermediation function is the result of investment consultants being
effectively active as ‘mediators.’ The following figure serves the
classification of investment consulting within the context of various
consulting services – and, thus, the distinction from other service types:
Fig. 2: Investment consulting within the context of various consulting services.
[28]
This systematic classification and distinction enables an abstraction from the
practice-oriented real definition and, that way, leads to a theory-oriented
real definition of investment consulting:
Investment consulting is
an external,[basically aperiodic,] problem-specific and
function – resp. area-specific consulting service,
which represents a form of financial consulting for institutions.
through solving investment problems
to optimally achieve their financial objects and goals
Typology and Segmentation
The roots of modern consulting are in the USA[29]
and can be traced back to the first half of the 19th century. Foster
Higgins (1845), Sedwick (1858), and Arthur D. Little (1886) are considered to
be the first consulting companies, whereby especially the latter is seen as the
precursor of management consulting.[30]
In the 1820s, the choice of professional and external management services increased rapidly.
A broad spectrum of options developed through consulting-related professions
such as lawyers, accountants, and bankers. The profile of classic management
consulting such as we know it today emerged only with the establishment of
eventually world-renowned consulting companies such as Arthur Andersen (1913),
Booz Allen Hamilton (1914), and McKinsey & Company (1926). Very beneficial
in this context was the separation of commercial and investment banks through
the Glass-Steagall Act of 1933. Until then, numerous tasks that nowadays are
part of the core business of management consulting had been performed by
commercial banks.[31]
Besides the prohibition of emission of and trade with shares, this law also
prohibited commercial banks to engage in business consulting and reorganization
on behalf of their corporate customers.[32]
In the second half of the 20th century, further important consulting companies
were founded such as The Boston Consulting Group (1963), Roland Berger (1967)
as well as Bain & Company (1973). Also during that period, many consulting
companies began to accelerate their internationalization and expanded their
activities into Europe. US-American companies have been dominating the
management consulting market worldwide ever since.
The following figure provides a chronological overview of the establishment of
consulting companies in general and, thus, of the genesis and historical
development of investment consulting:
Fig. 3: Founding years of important consulting companies.
[33]
The above chronology of company foundations includes classic management consultants,
consulting companies focused on auditing (cursive) as well as on pension and
investment consultants (bold).
The history of how the consulting market evolved can be divided into three major
periods, which represent the defining stages; these are: initialization,
professionalization, internationalization, and concomitantly differentiation as
well as consolidation. The following figure shows the attribution of investment
consulting to periods and stages of the consulting market:
Fig. 4: Development periods and stages in the consulting market.
[34]
The time before 1930 can be described as initialization since it was only then that
today’s consultant profile evolved. The establishment of Buck Consultants (USA)
and Hymans Robertson (UK), two investment consultants still active to this day,
occurred already at that stage. The subsequent years into the 1960s are
considered to be the professionalization stage since with increasing demand
from industrial companies, methods and concepts kept developing. The term
‘management consultant’ took roots. The establishment of several investment
consultants operating worldwide today falls in this stage: Russell Investments,
Watson Wyatt[35]
as well as Hewitt[36].
The 1970s were both the start of internationalization, which brought about the
tapping of markets in Europe, Asia, and Latin America, and of differentiation,
through which small consulting companies focusing on specific core areas
evolved. In that phase from 1972 until 1982, a number of still operating
US-American pension and investment consultants were founded: Callan Associates,
Wilshire Associates, Cambridge Associates, William M. Mercer[37]
as well as Aon[38].
Therefore, this decade can be described as the ‘cradle of modern investment
consulting.’ Because of the increasing importance of computers, consulting
companies specialized in information technology eventually evolved in the
1990s.
This grouping into periods, i.e., chronological clustering, can be fully converted
into segments of homogenous types of consulting services, i.e., clustering
according to content:
Fig. 5: The ‘Top 10’ consultants worldwide according to segments.
[39]
The origins of the consulting profession are not just in management consulting in general,
but, more specifically, also in strategic consulting (strategy). Later on, the
consulting fields ‘operations management’ and ‘information technology’
developed.
From the above figure it becomes evident that most of the large traditional management
consulting firms focus only on three activities. Thus, a ‘break’ can be
discerned, which divides the segments into two halves[40].
The providers in the segments human resources, actuary/pensions as well as
investments in the second half are to a large extent different firms from those
in the first half.
Furthermore, it becomes apparent that several firms in the second half are among the ‘Top
10’ in several segments. Nevertheless, globally active firms originating mostly
from the USA dominate both the first and second half. Myners states that
investment consultants in the UK have gained market strength to a large extent
based on their actuarial background.[41]
Moreover, it is notable that consulting units that are (PwC and KPMG) or were (Accenture[42])
part of an auditing company are active in the segments of both halves, but not
in the fringe segments.[43]
Nevertheless, the U.S. Securities and Exchange Commission (SEC) increased its
pressure on auditing companies to part with their consulting units.[44]
To bypass this requirement, all large firms preventively gave the business
field ‘consulting’ a new designation, ‘advisory’. Also, there are no longer any
‘consultants’, instead there are ‘advisors’.[45]
To achieve the typologization and segmentation of an individual investment
consultant, it again makes sense to point out the possibility of a schematical
classification. After all, the scope of individual characteristics is – like in
asset management companies – extremely varied. Individual characterization is
possible based on the morphological box below:
Fig. 6: Typologization criteria of investment consultants.
[46]
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Footnotes
Steele (1981): Consulting for Organizational Change, pp. 2 f.
Wilkinson (1995): What is Management Consulting?, pp. 1-4.
Kubr (Ed.) (2002): Management Consulting: A Guide to the Profession, p. 10.
Biswas/ Twitchell (2002): Management Consulting: A Complete Guide to the
Industry, p. 6.
See Kubr (Ed.) (2002): Management Consulting: A Guide to the Profession, pp. 3 and
7. For an historical and language cultural derivation of the word ‘consultant’,
that also comes to the same conclusion see Ziegler (1995): Beratung beim Wort genommen, pp. 55
ff.
See Mohe/ Heinecke/ Pfriem (2002): Beratung als Problemlösung, p. 131.
See Maister (2010): Professionalism in Consulting, p. 36.
McKenna (2006): The World’s Newest Profession, p. 12.
See Turner (1982): Consulting Is More Than Giving Advice, pp. 121 ff.; Gummesson
(2000): Qualitative Methods in Management Research, p. 7.
See Kraus/ Mohe (2007): Zur Divergenz ideal- und realtypischer Beratungsprozesse,
p. 268.
See McKenna (2006): The World’s Newest Profession, pp. 8 ff.; Binnewies (2002):
Strategisches Management professioneller Dienstleistungen am Beispiel der
Unternehmensberatung, pp. 38 ff.
See Niewiem/ Richter (2007): Make-or-buy Entscheidungen für
Beratungsdienstleistungen, p. 67.
In the framework of the principal agent theory, the legitimation function of
consultants is assigned great significance, which, however, they are only
partially able to fulfill; see Franck/ Pudack/ Benz (2003): Unternehmensberatung
als Legitimation, p. 10. For a wider-reaching examination on consultants’ legitimacy
see Ernst/ Kieser (2002): In Search of Explanations for the Consulting
Explosion; Faust (1998): Die Selbstverständlichkeit der Unternehmensberatung;
Kieser (1998): Unternehmensberater; Sturdy (1997): The Dialectics of
Consultancy; Gattiker/ Larwood (1985): Why Do Clients Employ Management Consultants?.
McKenna (2006): The World’s Newest Profession, p. 10.
For a more thorough inspection on consultants’ roles generally see Bloomfield/
Danieli (1995): The Role of Management Consultants; Canbäck (1998): The Logic
of Management Consulting – Part 1; Ernst/ Kieser (2002): In Search of
Explanations for the Consulting Explosion; Gattiker/ Larwood (1985): Why Do
Clients Employ Management Consultants?; Gummesson (2000): Qualitative Methods
in Management Research, p. 39; Heuermann/ Herrmann (2003): Unternehmensberatung,
pp. 339 ff.; Kieser (1998): Unternehmensberater; Nees/ Greiner (1985): Seeing
Behind the Look-Alike Management Consultants; Sturdy (1997): The Dialectics of
Consultancy. For an earlier and more practice oriented description see Bower
(1982): The Forces That Launched Management Consulting Are Still at Work, pp.
4. ff.
Biswas/ Twitchell (2002): Management Consulting: A Complete Guide to the
Industry, p. 7.
For a consideration of the personal characteristics required from a management consultant
comp. Gummesson (2000): Qualitative Methods in Management Research, pp. 196 f.;
on the necessary competencies see Maister (2010): Professionalism in
Consulting, pp. 38 f.
Illustration on the basis of Caroli (2007): Unternehmensberatung als Sicherstellung
von Führungsrationalität?, p. 117.
Mohe/Heinecke/ Pfriem (2002): Beratung als Geschäft, p. 221.
A real definition is a statement about the essence and the characteristics of a
subject area or a situation that – in contrast to a nominal definition –
implies reality; see Kromrey (2009): Empirische Sozialforschung, p. 155.
See Schein (1988): Process Consultation Vol. 1, pp. 1 ff.
For further specification of the roles see Kleeberg/ Schlenger (2000): Die Rolle
von Consultants im Rahmen der Spezialfondsanlage, pp. 871 ff.
‘Implemented consulting’ and ‘fiduciary management’ are not among the roles in
the narrow sense..
Trone/ Allbright/ Taylor (1996): The Management of Investment Decisions, p.
243.
Illustration on the basis of Caroli (2007): Unternehmensberatung als Sicherstellung
von Führungsrationalität? p. 111.
Especially in Chicago and New York numerous important consulting companies were
founded and are still headquartered there.
For a historical perspective on this subject going back to the origins of consulting
see Poulfelt/ Greiner/ Bhambri (2010): The Changing Global Consulting Industry,
pp. 8 ff.; McKenna (2006): The World’s Newest Profession, pp. 145 ff.; Kubr
(Ed.) (2002): Management Consulting: A Guide to the Profession, pp. 31 ff.;
Wilkinson (1995): What is Management Consulting?, pp. 1-9 ff.; McKenna (1995):
The Origins of Modern Management Consulting, pp. 51 ff.
See McKenna (2006): The World’s Newest Profession, pp. 16 f.
See Fink (2003): Eine kleine Geschichte der Managementberatung, pp. 4 ff.
Own figure based on Biswas/ Twitchell (2002): Management Consulting: A Complete
Guide to the Industry, p. 19;. Poulfelt/ Greiner/ Bhambri (2010): The Changing Global Consulting Industry, p. 15; Kennedy Consulting Research & Advisory
(2010): Consulting Market Research, website.
Own figure based on Fink (2005): Machiavelli, McKinsey & Co., p. 190.
Through the merger of Watson Wyatt and Towers Perrin in 2010, now part of
Towers Watson.
In the meantime, part of HewittEnnisKnupp, an Aon Company.
In the meantime, renamed as Mercer Investment Consulting.
In the meantime, part of HewittEnnisKnupp, an Aon Company
Own figure based on and according to the criteria resp. methodology of Biswas/
Twitchell (2002): Management Consulting: A Complete Guide to the Industry, p.
15; Pensions & Investments (2010): Research Center, website; Thomson Nelson
(2010): Database, website. For a comprehensive list of the ‘Top 50’ management
consultants comp. http://www.stormscape.com/inspiration/website-lists/consulting-firms/ [accessed November 12, 2010].
Left half marked in dark grey and right half in light grey.
See Myners (2001): Institutional Investment in the United Kingdom: A Review, p. 67.
Originates from Arthur Andersen; in 2002, Arthur Andersen ceased to exist as a
result of the Enron scandal.
The dotted fields show consulting companies with an auditing background.
See Poulfelt/ Greiner/ Bhambri (2010): The Changing Global Consulting Industry, p.
7; McKenna (2006): The World’s Newest Profession, pp. 17 and 235 ff.
See Niedereichholz/ Niedereichholz (2006): Consulting Insight, p. 187.