We checked in with 10 independent search consultants to learn about their experiences in search processes like trends in discretionary and nondiscretionary investment models, challenges and the future of the due diligence process. After a disruptive year, many institutional investors have started to make changes in their organizations, resulting in high search volumes for consultants. These ten consultants have conducted over 210 different searches on behalf of institutional investors over the past two years, resulting in a meaningful gauge of the industry represented in the findings below.

number of searches by yearOverall search volume has been high the past two years

On average, each of these firms conducted at least 10 searches over the past two years, with 20 searches at the high end of that range.

Number of searches:

  • 2020 – Range 5-20 with an average of 11
  • 2019 – Range 6-20 with an average of 10.5

current model graphicFor most institutional investors requesting these searches, the nondiscretionary model tended to be the one they were using at the time of the search.

Current model:

  • Discretionary – 28%
  • Nondiscretionary – 54%
  • In-house – 18%

Most of the searches have been for discretionary providers, suggesting a trend shifting away from nondiscretionary to discretionary. However, some searches were solely for nondiscretionary or looked at both sets of providers.

searches for providers graphicSearches for providers:

  • Discretionary – 59%
  • Nondiscretionary – 22%
  • Both – 19%

Of the group looking for discretionary models, the highest number came from the nonprofit sector, which would include endowments, foundations and healthcare entities. Search consultants are seeing the most requests for their services coming from university or college endowments, with 87% saying they have customers from that segment.

Of the consultants interviewed, 60% said college or university endowment clients tend to be more likely to bring their own list of OCIOs to include in RFPs rather than rely heavily on your expertise. Nearly half (40%) said community foundations were the next most likely to do so.

Discretionary searches completed by market segment

Percent breakdown by market

Source: SEI data.

Minimal activity from defined contribution plan sponsors

On the defined contribution (DC) front, it does not appear that search consultants are being used in a large capacity. Less than a third (30%) have conducted searches for DC providers over the past two years. Half of those interviewed said they do not anticipate doing any OCIO searches over the next three years. Of the three consultants that have conducted searches for DC plan sponsors, all were for custom target date funds and core menu lineup/mandate or product.

The ins and outs of the search process

The search consultants seemed to have consistencies regarding how they conducted searches and what they were looking for in providers for their customers.

When reviewing RFIs/RFPs, “proposed recommendations and observations (such as IPS or portfolio)” and “performance” appear to be most important when search consultants are evaluating providers. “Fees” and the “type of provider” appear to be less important.

The fewer the better: None of the search consultants said they invite more than 10 firms to respond to the RFIs or RFPs they conduct. More than half (55.6%) said they limit the number of respondents to five or fewer (n=9 responses to this question).

The search consultants were asked to rank seven factors of importance when evaluating responses to RFIs and RFPs. Based on the weighted system, results are listed below.

Most important factors:

  1. Proposed recommendations and observations (such as IPS or portfolio) – Four of the 10 firms ranked this number one, and six had it as a top three.
  2. Performance – Two of the 10 ranked this as number one, and five ranked it as a top three.
  3. Proposed team – Five had this in the top three, while one ranked it first.
  4. Experience specifically with that type of client Only two ranked this as a top three.
  5. Customized responses to each specific client (vs. standard response to similar questions) – Interestingly, three ranked this first or second, but all of the remaining 10 ranked it five or lower.
  6. Fees None of the respondents ranked this higher than third, and six of the 10 ranked it sixth or seventh.
  7. Type of provider (such as large OCIO or boutique firm) – Seven of the 10 ranked this as the least important factor.

A look ahead: Growth is expected to continue

None of the 10 consultants interviewed expect their volume of searches to decrease over the next year, while six said they expect their searches to increase.

Asked what they believe will influence more institutional investors to conduct searches, consultants anticipating an increase agree on three top drivers:

  1. Unhappiness with the performance of current provider 
  2. More interest in discretionary services by current nonusers 
  3. Increased recognition of challenges in handling a search process internally 

More of those interviewed expected nonprofits to be the top segment driving growth, followed by corporate-defined benefit plan sponsors. Within the nonprofit sector, search consultants believe college and university endowments and private foundations will be the segments expected to conduct the most searches.

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Legal Note

The SEI Research Panel completed a comprehensive survey of search consultants in North America to gauge their views on a numbers of critical components for due diligence searches. The poll was completed by ten independent consultants responsible for overseeing searches for discretionary and nondiscretionary investment management providers. The poll was conducted in April 2021.

This information is provided by SEI Investments Management Corporation (SIMC), a registered investment adviser and wholly owned subsidiary of SEI Investments Company (SEI). Investing involves risk including possible loss of principal. There can be no assurance that your investment objectives will be achieved nor that risk can be managed successfully.

This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice. This information is for educational purposes only and should not be interpreted as legal opinion or advice.