They have a long history in the US. Michael Lester looks at the present-day role of real estate investment consultants
There is a long, rich (and not so rich) history of institutional real estate consultancy in the US. Consultants give advice and usually have no vested interest in whether that advice is received with gratitude or summarily ignored. Consultants help pension funds build real estate portfolios and monitor those assets in line with the ‘big picture’, a pervasive image that the consultants assist in creating and regularly re-drawing.
Consultants are also gatekeepers. They act as buffers, as intermediaries, as managers of the managers. They are experts with varied responsibilities (see box) depending on the needs of their clients, which in the US include private and public pension funds, Taft-Hartley funds, endowments, foundations, healthcare and insurance companies.
The profession materialised more than a century ago in the US in the late-19th century, primarily in the railroad industry and the burgeoning manufacturing sectors. Employers sponsored retirement plans for their loyal workers. But these early plans did not do well and soon disappeared.
In the 1920s, Congress began treating qualifying retirement plans with special tax-favoured status (and still does). Plans had a small staff (and still do) and needed advice and assistance in meeting their goals. Stocks and bonds were their primary focus (and still are) but with the passage of the Employee Retirement Income Security Act (ERISA) in 1974 – where the standard for investment was ‘what would a prudent person do?’ – real estate solidified its supporting role in most portfolios.
“Many boards realised that they might not have sufficient in-house expertise, and, in order to determine whether alternative assets were appropriate for their portfolios, they would hire a consultant who was an expert,” says David Glickman, a managing director of Pension Consulting Alliance (PCA). “Because that’s what a prudent person would do.”
Michael Dieschbourg, senior managing director of Broadmark Asset Management and a member of the board of directors of the Investment Management Consultants Association, says: “Around the time of ERISA, insurance companies – the Prudentials [Financial] and the Hancocks – had already started investing in a big way in real estate. Pension plans looked to the insurance companies for real estate expertise.” So, the plans looked to consultants.
Founded in 1988, PCA is one of the newer institutional consulting groups (Russell Investments, for example, was founded in 1936). Not all of its 32 clients, representing $900bn (€689bn) in plan sponsor assets, invest in real estate. Like the big, full-service, institutional consulting firms – Callan Associates, Cambridge Associates, Hewitt EnnisKnupp, Mercer, Russell and Wilshire – PCA has a real estate division with five full-time senior consultants primarily in California, Oregon and New York. The bigger pension plans have a variety of consultants. For example, PCA is the real estate consultant to the Maryland State Employee Retirement System, which uses Hewitt EnnisKnupp for general consulting, even though HEK has its own real estate division.
“The large pension plans have a real estate adviser, whether it’s a general consultant who has real estate experience or a special consultant who works only within the real asset sector,” says Michael Dudkowski, managing director of Wilshire Associates.
A handful of institutional consulting firms specialise in real estate investing: Bard Consulting (based in San Francisco), Courtland Partners (Cleveland), Crosswater Realty Advisors (Los Angeles), ORG Portfolio Management (Cleveland) and Townsend Group (Cleveland).
Pension fund real estate officers do not deal directly with their properties or their investments; they rely upon and interact regularly with investment managers who handle the investment funds and nuts-and-bolts, day-to-day operations. The officers rely on their consultants to monitor the managers.
There are thousands of institutional consultants in the US, but probably just two or three dozen professionals dedicated exclusively to real estate. It is a small, savvy, select group of ‘numbers people’ who know each other, socialise at conferences, and compete with each other for clients.
Consultants are not like European multi-managers. A consultant provides advice and keeps tabs on the investment manager, while a multi-manager oversees portfolios of funds on a discretionary basis. However, Dieschbourg points out “when they wear multiple hats – consultant, general partner and investor – US consultants are like European multi-managers.”
For example, Townsend is a money-manager as well as a consultant. “Some pension funds believe that their consultants have a good amount of knowledge and access to investments, and they chose the consultants to give advice as well as be their investment manager, with discretion – on a much higher fee schedule,” explains Glickman. “At PCA, we feel that this dual role offers an opportunity but also a potential conflict. We prefer to make independent calls and not ever have to answer the question: ‘In whose interest are you acting?’ We want to avoid any potential for conflicts of interest.”
Consultant fees vary. They are usually based on the project; it can be a small, defined project such as suggesting a specific investment fund or a meatier mission such as replacing a manager. Fees are often based on the task involved and on assets under management, but it is common for fees to be calculated on an hourly basis with an annual retainer.
Because of their sullied reputation, consultants are sometimes considered to be overpaid. Yet pension funds in the US have used them – appreciatively – for decades and will continue to depend on them as long as funds are understaffed. When you are investing hundreds of millions of dollars, somebody has to manage the managers.