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The advisory industry has shown remarkable resilience since the crisis
Sep 28th 2013 | New York |From the print edition
CONSULTANTS studiously avoid taking credit for their clients successes in
order not to be blamed when things go awry. They have not been able to avoid
the spotlight during the financial crisis. In a 2008 shareholder report
explaining a huge write-down, UBS blamed external consultants for
recommending that it go into areas like subprime mortgages. An ex-head of
Citigroup s investment bank told investigators he had relied on a careful
study from outside consultants when moving into collateralised-debt
obligations.
Yet although many Wall Street titans failed during the crisis, the advisers
whispering in their ears have emerged even stronger (see chart). According to
Kennedy Information, a research firm, the global financial-services consulting
business posted record revenues of $49 billion in 2012, a fifth of the
consulting industry s total.
Three main factors account for the consultants resilience. Perhaps the most
powerful is the business s each-way bet on boom and slump. When the economy is
flourishing, banks, insurers and asset managers are eager for counsel on
mergers, marketing and expansion. When it crashes, they are desperate for
guidance on cutting costs and divesting dud assets. The Firm , a new history
of McKinsey, recounts how the company s consultants joked that they would first
tell banks to close underperforming branches. Once they cut too far, McKinsey
would then recommend ambitious expansion. When the banks grew too large, the
cycle would start anew.
A second boost comes from the rise of Big Data . Regardless of the business
cycle, banks and investors are constantly improving statistical models and
trading platforms. All six of the biggest financial consultants the consulting
arms of the Big Four accounting firms of Deloitte, PwC, Ernst & Young and
KPMG, plus IBM and Accenture have large information-technology practices. A
handful of boutiques, such as Britain s Holley Holland, specialise in
integrating the data systems of sprawling financial conglomerates.
Consultants have also profited from financiers consistent failure to analyse
their own businesses. Banks and asset managers have little information on their
clients behaviour and preferences. That has opened the door for strategy
consultants, from generalist giants like McKinsey and Boston Consulting Group
to niche advisers such as Novantas and First Manhattan. Such firms have
industry benchmarks coming out of their ears.
The final source of buoyancy for the consultants is compliance and risk
consulting. Facing a host of new rules, clients have flocked their way. Perhaps
the biggest beneficiary is Promontory, a boutique headquartered in Washington,
DC, that now has nearly 400 employees. Its boss, Eugene Ludwig, once led
America s Office of the Comptroller of the Currency (OCC); most of its staff
have come from the public sector. It charges hefty fees to advise firms on how
to comply with regulations and what to expect from the government. Promontory s
fans argue that it helps firms follow the rules. Critics counter that
ex-regulators inside knowledge enables clients to exploit overstretched public
agencies.
In some cases governments have become big clients themselves. Oliver Wyman, a
strategy firm, did little work for the public sector before 2009; now such jobs
make up an estimated fifth of its financial division s revenue. The Bank of
Spain hired it to stress test the country s banking system in 2012; on
September 24th the European Central Bank announced it had chosen the company to
help review loan books across the continent for its forthcoming asset quality
review .
Regulators can also hand work to consultants indirectly, by ordering the
targets of regulatory actions to hire outside firms. But that risks creating a
conflict of interest between the consultant s loyalty to the company that pays
it and to the regulator it must report to. In 2004 New York regulators and
Standard Chartered agreed that the bank would hire an outside firm to examine
its money-laundering compliance standards. In 2012 state regulators accused the
consultant, Deloitte, of providing Standard Chartered with confidential
information about its other clients, and of removing a recommendation from a
report at the bank s behest. In June Deloitte agreed to pay a $10m fine and for
a year to stop taking on new work requiring the regulator s approval. New York
has also subpoenaed Promontory in the case, and PwC in an investigation of its
work for a Japanese bank.
A much bigger snafu unfolded in 2011-12, when the OCC and the Federal Reserve
began a review of home foreclosures. They required 14 mortgage servicers to
engage independent analysts to pore through 800,000 loans. Almost two years
later, the firms had not finished even a quarter of the work. In January the
government reached a deal with 11 of the servicers to end the review early.
They agreed to pay homeowners $3.6 billion less than twice the $2 billion paid
to the consultants.
All of which has increased the odds that financial consultants will themselves
become targets of regulation. In its deal with New York, Deloitte agreed to new
rules regarding communication with the government and transparency. The state
is now making those policies mandatory. Federal restrictions may be next. In
April the Senate held a hearing on the industry. The OCC has requested that
Congress allow it to sanction misbehaving companies; Maxine Waters, a
Democratic legislator, has introduced a bill that would require the government
to pay consultants directly. Consultants have spent years profiting from the
heavy hand of the state. They may soon get slapped by it.
From the print edition: Finance and economics