Investment consultants advise institutional investors on their choice of fund manager. Focusing on U.S. actively managed equity funds, we analyze the factors that drive consultants’ recommendations, what impact these recommendations have on flows, and how well the recommended funds perform. We find that investment consultants’ recommendations of funds are driven largely by soft factors, rather than the funds’ past performance, and that their recommendations have a very significant effect on fund flows. However, we find no evidence that these recommendations add value, suggesting that the search for winners, encouraged and guided by investment consultants, is fruitless.


Investment consultants are important intermediaries in institutional asset management. Many retirement plans, foundations, university and other endowments, and other so-called plan sponsors1 engage investment consultants to provide a range of investment services. These include asset/liability modeling, strategic asset allocation, benchmark selection, active vs passive management, fund manager selection, and performance monitoring. It has been estimated that, as at June 2011, almost $25 trillion of institutional assets worldwide were advised on by investment consultants (Pensions and Investments (2011)). Goyal and Wahal (2008) estimate that 82% of U.S. public plan sponsors use investment consultants, as do 50% of corporate sponsors. Furthermore, in some countries plan sponsors are required by law to consult investment consultants before making their investment decisions.2 From the perspective of asset managers, investment consultants are key “gatekeepers”, whose opinions determine whether a plan sponsor will even consider a particular fund. Despite a voluminous literature questioning whether active managers can add value for investors, many plan sponsors continue to search for active managers. Investment consultants play a critical role in both encouraging and guiding this search for “winners” and so understanding whether they add any value for investors has important implications for investment strategy.

The investment consulting industry is highly concentrated: measured by assets under advisement the top ten consultants have a worldwide market share of 82% (and the top ten in the U.S. an 81% market share), according to Pensions and Investments (2011). The five largest investment consultants in 2011 were Hewitt EnnisKnupp ($4.4 trillion under advisement), Mercer ($4.0 trillion), Cambridge Associates ($2.5 trillion), Russell Investments ($2.4 trillion) and Towers Watson ($2.1 trillion). Unsurprisingly, institutional asset managers…