The Financial Conduct Authority (FCA) is to consult on whether to make a market investigation reference on the investment consultancy market to the Competition and Markets Authority (CMA).
The call, which is the first time the FCA has exercised this power, was contained in the interim findings of the regulator's Asset Management Market Study.
The report found the market to be heavily concentrated with 60% of market share being taken up by three firms, Aon Hewitt, Mercer and Willis Towers Watson.
The study also contains a recommendation that the provision of institutional investment advice is to be regulated by FCA.
According to the report, while investment consultants undertake valuable due diligence for pension funds, they are not effective at identifying outperforming fund managers.
Difficulties were also found in clients being able to assess and monitor their investment consultant. This was seen to be a particular issue for smaller pension schemes.
According to the report, the information "presented was at times difficult to understand and important factors were not always highlighted. This could lead to poor performance not being communicated or being easily disguised."
The report also contains the recommendation that smaller schemes should be helped to pool their assets where necessary.
Commenting on the report, the FCA's executive director of strategy and competition Christopher Woolard said: "The principle issue here is that from a legal point of view trustees are reliant on their consultant's advice. They need to have the necessary information to be able to push back and challenge the advice they receive where necessary."
The report also highlights concerns around the adoption of fiduciary management by consultants. While the report identifies that a firm recommending its own in-house fiduciary management survey was not necessarily problematic, there was an incentive for consultants to recommend such a service even when a client might be better served by another model or provider.
Some asset managers also highlighted the conflict of interest this model brings. Some said they were concerned they had to share the details of their products with the investment consultant to receive a rating. However, the investment consultant could then take those ideas and use them to develop their own product.
Punter Southall head of investment consulting Danny Vassiliades called the report "an important and necessary review" and welcomed the recommendation to the CMA.
"There is a clear requirement for more competition in the investment consulting market. Currently, the industry is dominated by three large providers. We believe this has a number of negative consequences for pension schemes and the market more widely.
"We welcome any action that increases the level of competition in the market. Specifically, we encourage the FCA to consider in more detail ways in which schemes can assess the performance of their consultant and determine whether their fees have been justifiable."