Investment Consultants and Manager Selection

A large pension fund or university endowment typically doesn't have the staff to evaluate every hedge fund, private equity firm, and mutual fund manager it might invest with. Instead, it hires an investment consultant — a firm like Mercer, Cambridge Associates, or Aon — to do that research on its behalf: rating managers, building recommended shortlists, and advising on how much to allocate to each asset class and strategy.

Because so many institutional asset owners lean heavily on the same handful of large consulting firms, a positive or negative rating from a major consultant can move enormous sums of capital in or out of a manager, even before the manager's own performance has had time to prove itself. This makes consultants powerful gatekeepers: a new manager without a strong consultant relationship can struggle to raise institutional money regardless of investment skill, while an established manager who loses a top rating can see redemptions from multiple clients simultaneously.

This concentration of influence has drawn criticism similar to that aimed at proxy advisory firms — asset owners are effectively outsourcing a core fiduciary judgment (who should manage our money) to firms that don't bear direct financial consequences if their recommendations underperform.