Most of the country’s largest institutional investors employ consultants to help them make decisions impacting their trillions of dollars in assets.  Trustees of these corporate retirement plans, foundations and endowments assume doing so will lead to better results, after all costs, than those which could be achieved without consultants’ guidance.  Until recently, however, evidence to validate this assumption has been unavailable.

Ironically, investment consultants demand complete transparency about past performance from investment managers vying for a recommendation, but have offered little information to the outside world about their own track records.

Professors Tim Jenkinson, Howard Jones (both at the Said Business School, University of Oxford), and Jose Vicente Martinez (at the University of Connecticut, School of Business) have tackled this problem in their recent paper, “Picking Winners?  Investment Consultants’ Recommendations of Fund Managers.”  Their paper, soon to be published in the Journal of Finance, is the first to evaluate the formation, impact, and accuracy of investment consultants’ recommendations.

The period of study spanned 13 years (1999-2011) and included results of the top ten consulting firms which collectively hold a 91% share of the U.S. consulting market.  In other words, they consult to nearly all of the country’s pension plan assets.  Since consultants often encourage the search for “winners,” or managers who can beat the market, the authors focused on recommendations of active U.S. stock managers.

The authors found consultants not only failed to add value after accounting for their fees, but returns of the active managers recommended were actually about 1% lower, on average, than returns of those managers not recommended.

From our perspective, these results suggest institutional investors and their consultants face the same challenges we all do.  Whether investing billions or thousands, the probability of beating the market is so remote it isn’t worth attempting.  Not even highly-paid consultants can improve your odds.  The surest path to success for all investors is focusing on the things truly within one’s control—costs, diversification, and patience