The unspoken conflict of interest at the heart of investment consulting

AFTER World War II, the portfolios of US institutional investment plans began growing rapidly. As at 2021, the total assets held by US public and private pensions alone exceeded US$30 trillion. Much like their predecessors in the mid-1900s, the trustees that oversee these assets have limited time and varying levels of expertise. This forces them to rely on the advice of staff and non-discretionary investment consultants.

My purpose here is to reveal an especially pernicious bias of investment consultants. This revelation is important because it is often masked by the inaccurate claim that their advice is conflict-free.

The problem is that while investment consultants may claim their advice is conflict-free – and their clients may believe them – in reality, it is often heavily biased by the investment consultants’ own self-interest.