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The Definition of Investment Consulting including Typology and Segmentation
Dr. Bastian Runge, 17 pp.
This paper provides a definition of the profession of investment consulting including a methodology for typology and segmentation. Starting with a general view on management consulting it explores the investment consulting as an independent professional advisory service. Next to the origins of the consulting profession and a description of the history of the consulting market it also gives an overview of the tasks, functions as well as roles of consultants.
Keywords: Investment consulting, management consulting, independent professional advisory service, problem solving, consulting tasks, consulting functions, roles of consultants, roots of modern consulting, history of the consulting market, origins of the consulting profession, typologization criteria.
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.”
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.”
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.”
The term ‘management consultant’ can be defined as “a universal term for any professional who provides assistance to others, usually for a fee.”
All four definitions include the essence on which consulting is based: independent assistance with problem solving. The existence of a problem is, thus, constitutive for a consulting demand.
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. 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.”
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:
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. Insofar, also knowledge transfer is, besides problem solving, a dominant function of consulting; thus, knowledge is a central parameter in the definition of consulting.
Besides law firms, auditing companies, and also investment banks, investment consultants are among ‘professional service firms’ that perform particularly knowledge-driven services. Other functions that can be classified as latent are:
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.“
For a deeper understanding of consulting in general, it is advisable to take a look at the roles. 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,” the following figure offers an integrative observation of roles, functions, and tasks of consultants.
Fig. 1: Tasks, functions, and roles of consultants. 
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”.
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.
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 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. 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.
The essence of investment consultants’ classic roles – i.e., in the narrow sense – is that “the role of the investment consultant is to manage, not to make investment decisions.” 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. 
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
The roots of modern consulting are in the USA 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.
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. 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.
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. 
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. 
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 as well as Hewitt. 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 as well as Aon. 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. 
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. 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.
Moreover, it is notable that consulting units that are (PwC and KPMG) or were (Accenture) part of an auditing company are active in the segments of both halves, but not in the fringe segments. Nevertheless, the U.S. Securities and Exchange Commission (SEC) increased its pressure on auditing companies to part with their consulting units. 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’.
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. 
Binnewies, S. (2002)
(Strategisches Management professioneller Dienstleistungen am Beispiel der Unternehmensberatung):
Strategisches Management professioneller Dienstleistungen am Beispiel der
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Investment Consulting in Institutional Asset Management – Table of Contents
Conceptual Design and Empirical Analysis from a Global Perspective with Particular Focus on Manager Selection
Dr. Bastian Runge, 520 pp.
This research paper provides a holistic analysis of investment consulting as an important service segment in institutional asset management. Its subject is the theoretical and empirical analysis of supply, demand, market environment and the interactions between market participants in investment consulting. The focus is on manager selection as a substantial part of the business model and value chain. It provides a definition of the profession as an independent professional advisory service including a methodology for typology and segmentation. Next to the origins of the consulting profession it gives an overview of the tasks, functions as well as roles of consultants. This paper also contains an empirical analysis of the supply in investment consulting from a worldwide perspective. It differentiates between the regions Americas, EMEA and APAC as well as the Anglo-Saxon and the non-Anglo-Saxon regions. The business model and value chain are analyzed by comparing the supply and demand of services according to asset categories, by presenting a SWOT analysis of exogenous and endogenous factors, and by presenting various compensation models.
Keywords: Investment consulting, definition and scope, typology and segmentation, market size and structure, defining dimensions of demand, scientific components of explanation, information economics, transaction cost theory, property rights theory, principal agent theory, concept of fiduciary, concept of trusteeship, service components of supply, business model and value chain, definition of investment policy, asset-liability analysis, strategic asset allocation, manager selection, allocation, and monitoring, implementation, investment controlling, due diligence, process and instruments of manager selection, databases, request for proposal (RFP), research interview, on-site visit, beauty contest, criteria of manager selection, 6-P approach (people, philosophy, process, performance, product, pricing), exogenous and endogenous trends and drivers, selection of investment consulting providers, dealing with providers in investment consulting, quantitative and qualitative value-added by investment consulting, implications for practice.
Defining Dimension of Demand for Investment Consulting – Scientific Components of Explanation
Dr. Bastian Runge, 27 pp.
In many aspects, the demand for investment consulting can be explained by phenomena investigated in the theories of the new institutional economics. Significant drivers of demand are information risks, delegation risks and problems resulting thereof, such as asymmetrical information distribution, asymmetrical assessment and asymmetrical competence regarding problem-solving. These problems can be mitigated by the intermediatory function of investment consultants. These theoretical phenomena can also be found in practice in investment consulting and therefore are of high relevance for the actual market participants. They constitute the next major challenge in the asset management industry as a whole.
Keywords: Investment consulting, delegated portfolio management, improving the efficiency of coordination and exchange processes, neo-institutional explanatory approach, new institutional economics, information economics theory, transaction cost theory, property rights theory, principal agent theory, information asymmetry, adverse selection, hold-up, moral hazard, hidden information, hidden characteristics, hidden intention, hidden action, signaling, screening, reputation building, incentives, monitoring.
The Supply in Investment Consulting – Empirical Analysis of Business Model and Value Chain
Dr. Bastian Runge / David P. Pfleger, 13 pp.
This paper provides an empirical analysis of the supply in investment consulting from a worldwide perspective. It differentiates between the regions Americas, EMEA and APAC as well as the Anglo-Saxon and the non-Anglo- Saxon regions. The business model and value chain are analyzed by comparing the supply and demand of services according to asset categories, by presenting a SWOT (strengths, weaknesses, opportunities and threats) analysis of exogenous and endogenous factors, and by presenting various compensation models. Exogenous are facts that influence investment consulting externally, i.e. through the asset management business, while endogoenous drivers influence this market segment from an internal point of view.
Keywords: Investment consulting, business model and value chain, manager selection and its process, instruments and criteria, self-image of investment consultants, SWOT analysis of exogenous and endogenous factors including consulting-barbell, convergence of asset management and investment consulting, implemented consulting and fiduciary management as well as consultants for investment consultants (meta-consultants), compensation models in investment consulting.