The global financial crisis and its aftermath put the structure and performance of the global financial services industry into sharp relief. Questions have been raised as to what intermediaries individually and collectively add to the production of investment returns and social welfare in general. In this article, we look at the roles and responsibilities of investment consultants in relation to asset owners including pension funds, sovereign wealth funds, endowments, and family offices. Focusing upon the relationship between investment consultants and clients, it is argued that this relationship is characterized by ambiguity; there is a (desired) lack of clarity as to the precise roles and responsibilities of both parties. This argument is developed by reference to three prototypical pension funds, distinguished by asset size – a proxy for capabilities and resources. It is shown that although ambiguity may be of benefit to both sides of the market, it can also impose costs on clients, unable or unwilling to remake their relationships with intermediaries. The article highlights instances of innovation where these relationships have been redrawn so as to respond to the challenges of operating in global financial markets.
AkerlofGBlanchardORomerD (2014) What Have We Learned? Macroeconomic Policy after the Crisis, Cambridge, MA: MIT Press.
2.
AllenF (1990) The market for information and the origin of financial intermediation. Journal of Financial Intermediation1: 3–30.
3.
AllenFSantameroA (1998) The theory of financial intermediation. Journal of Banking and Finance12: 1461–1485.
4.
BatheltHGlücklerJ (2011) The Relational Economy: Geographies of Knowing and Learning, Oxford: Oxford University Press.
5.
BirkinshawJHamelGMolMJ (2008) Management innovation. Academy of Management Review33: 825–845.
6.
BoltonPDewatripontM (2005) Contract Theory, Cambridge, MA: MIT Press.
7.
BrennanGErikssonLGoodinRE (2013) Explaining Norms, Oxford: Oxford University Press.
8.
CaplinAMartinD (2011) Search and satisficing. American Economic Review101: 2899–2922.
9.
ChoiSJTriantisG (2013) Market conditions and contract design: Variations in debt contracting. New York University Law Review88: 51–82.
10.
ClarkGL (2014) Information, knowledge, and investing in offshore markets. Journal of Sustainable Finance and Investment4: 299–320.
11.
ClarkGLMonkAHB (2017) Institutional Investors in Global Markets: An Organizational Perspective, Oxford: Oxford University Press (forthcoming).
12.
ClarkGLUrwinR (2008) Best-practice pension fund governance. Journal of Asset Management9: 12–21.
13.
ClarkGLUrwinR (2010) Innovative models of pension fund governance in the context of the global financial crisis. Pensions15: 62–77.
14.
CoaseRH (1937) The nature of the firm. Economica4(16): 386–405.
15.
CoffeeJ (2006) Gatekeepers, Oxford: Oxford University Press.
16.
DavisKE (2013) Contracts as technology. New York University Law Review88: 83–127.
17.
DiamondDW (1984) Financial intermediation and delegated monitoring. Review of Economic Studies51: 393–414.
18.
DixonAD (2012) Function before form: Macro-institution comparison and the geography of finance. Journal of Economic Geography12: 579–600.
19.
EllsbergD (1961) Risk, ambiguity, and the Savage axioms. Quarterly Journal of Economics75: 643–669.
20.
FoxCRTverskyA (1995) Ambiguity aversion and comparative ignorance. Quarterly Journal of Economics110: 585–603.
21.
GennaioliNShleiferAVishnyR (2015) Money doctors. Journal of Finance70: 91–125.
22.
GilletteCP (2013) Tacit agreement and relationship-specific investment. New York University Law Review88: 128–169.
23.
GilsonRJSabelCFScottRE (2013) Contract and innovation: The limited role of generalist quartz in the evolution of novel contractual forms. New York University law Review88: 170–215.
24.
GlücklerJArmbrüsterT (2003) Bridging uncertainty in management consulting: The mechanisms of trust and networked reputation. Organization Studies24: 269–297.
25.
GortonGWintonA (2003) Financial intermediation. In: ConstantinidesGMHarrisMStultzR (eds) Handbook of the Economics of Finance, Amsterdam: Elsevier, pp. 431–552.
26.
GoyalAWahalS (2008) The selection and termination of investment management firms by plan sponsors. Journal of Finance63: 1085–1047.
27.
HachigianH (2015) The consequences and management of ambiguity for long-term investors, Oxford: Doctoral Dissertation. University of Oxford.
28.
HartOMooreJ (1990) Property rights and the nature of the firm. Journal of Political Economy98: 1119–1158.
29.
HeathCTverskyA (1991) Preference and belief: Ambiguity and competence in choice under uncertainty. Journal of Risk and Uncertainty4: 5–28.
30.
JenkinsonTJonesHMartinezJV (2015) Picking winners? Investment consultants’ recommendations of fund managers. Journal of Finance. Epub ahead of print. DOI: 10.1111/jofi.12289.
31.
KayJ (2012) The Kay Review of UK Equity Markets and Long-Term Decision Making, London: HM Government. Department for Business, Innovation and Skills.
32.
KeynesJM (1948) [1921]) Treatise on Probability, New York: MacMillan & Co.
33.
KimelD (2005) From Promise to Contract: Towards a Liberal Theory of Contract, Oxford: Hart Publishing.
34.
KnightFH (1921) Risk, Uncertainty, and Profit, New York: Houghton Mifflin.
35.
KnightERWDixonAD (2011) The role of investment consultants in transforming pension fund decision-making: The integration of environmental, social, and governance consideration into corporate valuation. In: HawleyJPShyamJKWilliamsAT (eds) Corporate Governance Failures: Role of Institutional Investors in the Global Financial Crisis, Philadelphia: University of Pennsylvania Press, pp. 217–241.
36.
LittermanB (2004) Modern Investment Management: An Equilibrium Approach, New York: Wiley.
37.
LoA (2012) Adaptive markets and the new world order. Financial Analysts Journal68: 18–29.
38.
MayerCVivesX (1995) Capital Markets and Financial Intermediation, Cambridge: Cambridge University Press.
39.
MertonRCBodieC (1995) A conceptual framework for analysing the financial environment. In: CraneDBFrootKAMasonSP (eds) The Global Financial System: A Functional Perspective, Boston: Harvard Business School, pp. 3–31.
40.
MertonRCBodieC (2005) Design of financial systems: Towards of synthesis of function and structure. Journal of Investment Management3(1): 1–23.
41.
RoeMJ (2006) Legal origins, politics and stock markets. Harvard Law Review120: 460–527.
42.
RosenbergN (1995) Innovation’s uncertain terrain. The McKinsey Quarterly3: 170–185.
43.
ScottWR (2008) Institutions and Organisations: Ideas and Interests, 3rd ed. London: Sage Publications.
44.
ShillerRJ (2005) Irrational Exuberance, 2nd ed. Princeton: Princeton University Press.
45.
ShleiferA (1985) A theory of yardstick competition. Rand Journal of Economics16: 319–327.
46.
StorperMJ (2000) Conventions and institutions: Rethinking problems of state reform, governance and policy. In: BurlamaquiLCastroACChangH-J (eds) Institutions and the Role of the State, Cheltenham: Edward Elgar, pp. 73–100.
47.
YoungdahlJ (2013) Investment Consultants and Institutional Corruption. Working Article 7, Cambridge, MA: Edmond J Safra Centre for Ethics, Harvard University.
