Choosing Pension Fund Investment Consultants

Pension funds rely on the advisory services of investment consultants for asset allocation decisions, manager selection, and performance benchmarking. While prior research finds that consultants generally do not add value, pension funds have increased the number of consultants over time, particularly in alternative assets, such as real assets, private equity and hedge funds. We explore the factors underlying the hiring and firing of consultants and examine whether these decisions are made in the best interests of participants. We find that consultants are more likely to be hired by funds with high allocations to alternative assets or having political boards. Pension funds are also more likely to hire consultants that have a discretionary asset management services arm, despite potential agency conflicts. Both hiring and firing depend on past performance, although we find weak evidence that performance improves subsequent to a consultant turnover. Overall, our evidence is consistent with pension funds hiring consultants to shift responsibility rather than improve performance