Mercer Investment Consulting realised earlier than its competition that it needed to diversify its client base from defined-benefit pension funds if it were to maintain high-quality research and decent profits. While advising pension funds continues to be the greatest contributor to revenues, is a business in decline.

The investment consultancy is building a wider client base encompassing wealthy families, banks that are drafting in external managers to run their assets, and government agencies, such as the Norwegian Ministry of Finance. The diversification allows Mercer to fund costly manager research, but has forced Mercer into a hiring spree. In Germany, where Mercer hired Reinhard Liebing, it has focused on winning business from local banks who are seeking advice on how to spin off their asset management activities. The practice has doubled in size over the past year. Other recent hires include Danny Vassiliades, who joined as a consultant in the UK, and Danny Quant, hired from Mercer's closest rival, Watson Wyatt. Quant's remit is to broaden the firm's business into the commercial market segment in Europe. Andrew Kirton, European head of Mercer Investment Consulting, said: "Lots of banks are outsourcing asset management decisions and there is scope to give advice. As these are professional clients they don't necessarily want advice on which managers to select but intelligence on the market as a whole." Elsewhere, Nicola Carcano arrived from Italian private bank BSI to head Mercer's Italian investment consulting business. He was previously head of institutional asset management and banking relationships at BSI, and is charged with winning bank advisory business in Italy. "Most assets are under the control of the banks and this outsourcing trend is widespread in Italy," added Kirton. Mercer has reacted quickly to keep pace with the changing requirements of its client base and to capture the lion's share of a new market for asset management advice that is emerging. Perhaps a little belatedly, the firm has this year made a bigger push into advising on alternative investments. Last month it announced plans to double the number of specialists in this area from six to 12 by the end of the year, as it expands its coverage of equity-based and fixed income-based hedge funds, private equity funds and multi-strategy funds. The firm has an agreement with Chicago-based firm Hedge Fund Research giving it access to an extensive database of hedge fund analysis. Mercer Investment Consulting continues to provide research to the group's new multi-manager operation, Mercer Global Investments. The business launched its first European funds domiciled in Dublin this summer. Mercer's main rival, Watson Wyatt, was ranked third in this year's awards, behind the much smaller PSolve. Although Watson Wyatt has several loyal pension fund clients, the departure of many of its most experienced investment consultants last year affected the firm. Watson Wyatt has rehired and expanded the investment consultant practice quickly but many managers feel the depth of knowledge among its junior staff is lacking. Psolve, ranked second, has a different business model from Mercer and Watson Wyatt. It runs a multi-manager programme, where it dynamically allocates between asset classes and managers. It was set up in 2001 by Mike Faulkner and Andrew Drake who worked together at Towers Perrin, and has more than 100 clients. It runs about £1bn in an asset allocation fund.