Hanz and Franz, and the Prudence Protection Racket

Good column by my colleague Harold Bradley about what he aptly calls the prudence "protection racket". In short, institutional investors hide behind expensive investment consultants who won’t release credible performance figures, but whose blessing is required by investment committees:

The average big institutional investor (of 1,075 surveyed) pays an investment consultant $240,000 a year, says Greenwich Associates. That means institutional investors contributed at least $258 million to the fiscal health of the investment consulting industry last year.

In return, institutions and their trustees received advice on portfolio construction and risk management. Eighty-three percent of U.S. pension funds and endowments use investment consultants.

A friend, and successful consultant, describes the value proposition for investors this way: “I can tell you the principal role is to be in charge of blame so as to relieve Chief Investment Officers and fiduciaries of that burden. The rest is ceremonial.”

Ceremonial may be the best of outcomes.  The Wall Street Journal says Wilshire Associates, Cambridge Associates and Mercer Investment Consulting are among the more recognized consultants who steered more than $500 million of their clients’ money into funds managed by Westridge Capital Management. It’s gone, kaput, vaporized in a Bernie Madoff Ponzi cloud.

I agree entirely, and you can read the rest here.