Questions to Ask an Investment Advisor Before They are Hired aka ”The Interview”

Questions to Ask an Investment Advisor Before They are Hired aka ”The Interview”

At times it becomes necessary to end a relationship with one investment manager and begin a relationship with a new firm. When such a change has been decided upon, it is best practice to not rush to the next investment manager that promises good returns, low fees, and excellent client service. Instead, a thoughtful investor will take the time to solicit proposals from several investment managers who have a good reputation and standing within the investment community.

 

This “manager search” will include the following steps:
  • Identify candidate managers.
  • Contact candidate managers to determine if they are willing to participate in a formal Request for Proposal process.
  • Deliver a data collection packet to the candidate managers (link to sample).
  • Collect candidates’ investment responses/proposals.
  • Evaluate similarities and differences between the candidates’ responses.
  • Evaluate whether the candidates’ responses are in harmony with the client’s own investment objectives and principles. (In most cases clients have not taken the time to define these unique financial objectives and investment principles. It is really important that these be defined because they will serve as the foundation of the engagement with the new investment manager.)
  • Deliver to the selected candidate(s) the client’s Investment Objectives, Principles and Procedures document, and coordinate relationship and asset transition.

Download Sample RFP Questions

At Anodos, we help our clients answer the question, “Is my investment advisor doing a good job?” Many of our clients are individual trustees, business managers, ERISA trustees and endowment board members who are obligated to independently monitor the activities of the agents to whom investment duties have been delegated. What makes us unique is this is all we do. We don’t manage money, sell insurance, or accept referral fees. We don’t have a horse in the race.

Will ERISA Trustees ever learn? or “I guess they aren’t that smart at Princeton”

Will ERISA Trustees ever learn? or “I guess they aren’t that smart at Princeton”

The Duty: An ERISA trustee is obligated to know who is being paid what by whom and whether the fees being paid are fair and reasonable. This duty is implicit in the trustee’s duty of prudence under C.F.R. §404a-1 and is specifically required by the U.S.C. §1104(a)(1)(A)(ii).

The Breach: The ERISA plan trustees at Boeing and Lockheed Martin and Fidelity and Aon Hewitt and Verizon and Oracle and Intel and Xerox and many, many other Fortune 500 companies have paid out billions of dollars in settlements or damages arising from ERISA class action lawsuits. The trustees of all these mega plans fell asleep at the switch and approved expensive retail fee agreements when wholesale fees were available. And recently a class action claim was filed against Princeton University making the same claim–excessive fees and below average performance.

The Complaint: The complaints always say the same thing because they are filed by the same class action law firm that specializes in this work:  “[Plan Sponsor] selected and retained investment options for the plans that historically and consistently underperformed their benchmarks and charged excessive investment management fees, as well as share classes that were more expensive than other share classes readily available to qualified retirement plans that provided plan investors with the identical investment at a lower cost.”

Wholesale v. Retail: Plan trustees, I’ll break it down for you; PAY WHOLESALE, NOT RETAIL! If you are buying a fleet of 1,000 cars  from GM you’re not going to pay retail. If you are buying hotdogs for Dodger Stadium you’re not going to pay retail. If you are buying laptop computers for all the students in a school district you’re not going to pay retail. So why do ERISA trustees keep agreeing to pay retail prices to the investment industrial complex?

Trust but Verify: Do ERISA trustees really think the service providers they are using are going to say, “Hey, ERISA trustee, I think the funds we made available to your participants have above average fees and below average performance!” It’s never going to happen because the vendors (service providers) do not owe any fiduciary duties to the plan sponsors who use them.  It is the plan trustees’ job to do this performance and fee investigation. If the investment committee doesn’t have time to do this work or doesn’t have the experience to do it, they should hire a fiduciary governance consultant to do this work. Obviously the current investment consultant is disqualified from reviewing their own work.  A performance and fee investigation is fundamental to the prudent administration of the plan.

 

At Anodos, we help our clients answer the question, “Is my investment manager doing a good job?” Many of our clients are individual trustees, business managers, ERISA trustees and endowment board members who are obligated to independently monitor the activities of the agents to whom investment duties have been delegated. What makes us unique is this is all we do. We don’t manage money, sell insurance, or accept referral fees. We don’t have a horse in the race.

When to Fire an Investment Advisor

When to Fire an Investment Advisor

Question: When, if ever, should a business manager recommend that their client fire their investment advisor?

Answer: It will be time for your client to part ways with their investment advisor when, over a protracted period of time, the investment advisor has been unable to accomplish the job they were hired to do.

The problem is knowing how to define the job for which the investment advisor has been hired and measure their activities and performance against that job description.

Following is a link to a white paper we wrote to help business managers define what should be included in the Investment Policy Statement (job description) that is delivered to their clients’ investment advisors.

This White Paper answers the following questions:

  • What are the elements of the investment advisor’s Investment Policy Statement that need to be documented?
  • What factors of the investment plan can the investment advisor control?
  • Should the benchmark that the investment advisor proposes be the sole standard of measurement against which their activities are judged?

Download White Paper

At Anodos, we help our clients answer the question, “Is my investment advisor doing a good job?” Many of our clients are individual trustees, business managers, ERISA trustees and endowment board members who are obligated to independently monitor the activities of the agents to whom investment duties have been delegated. What makes us unique is this is all we do. We don’t manage money, sell insurance, or accept referral fees. We don’t have a horse in the race.

Bank v RIA as Investment Advisor:  A Cost-Benefit Analysis

Bank v RIA as Investment Advisor: A Cost-Benefit Analysis

Many investors ask, “Is it better to have a big bank (Goldman Sachs, for example) as my investment advisor or a Registered Investment Advisor (Bel Air, for example) to manage my money?” Following is a summary of the costs and benefits of each. The best investment platform should be determined by each investor’s unique preferences and principles. In short, reasonable minds can differ.

Bank Advantages Over RIA

  • Too big to fail.  Very rarely will a bank go out of business, but RIAs will with greater frequency have ownership transitions through acquisition, merger, or closure.
  • A flexible platform. Each advisor has broad latitude to meet their client’s needs in a way that they believe is suitable. Few banks dictate an institutionalized solution that must be accepted. Depending on the bank, the platform varies from flexible to very flexible in how the advisor may decide to implement the client’s portfolio.
  • “Deal flow” Banks have a distinct “investment banking” department that provides bank investment clients early access to interesting private equity deals and new issue public offerings.
  • Greater autonomy and flexibility in fee negotiation. Each advisor is a business unit that can, within company guidelines, establish the client-level fee for the particular services or products being provided to that client.  RIAs are much less flexible in their fee negotiations.
  • Integrated banking functions with investment management solutions. Cash flow management, short-term credit facilities, long-term credit facilities (mortgages), personal banking, insurance, et cetera can be provided under one roof.

 

RIA Advantages Over Bank

  • Fiduciary Standard applies to all accounts. An RIA is not allowed to receive income from any other source than the client.  It is difficult, even impossible, for a bank to say that there are no potential conflicts of interest in their management implementation.
  • Institutionalized investment process. Investment decisions are typically made by an investment committee that has a definable and defensible investment strategy and process that is institutionalized and does not vary from client to client. Few banks have this rigid, institutionalized investment process. Most banks have a collaborative “so what do you think about this strategy” approach which makes accountability and measurement of future results difficult to directly attribute to the advisor. This blurring of lines of responsibility is less likely to happen with an RIA. If you like what they do, you buy their strategy and get their solution.
  • Fees tend to be easy to calculate.  Fees charged on “assets under management” utilize an agreed upon fee schedule. Most banks have a variety of fee arrangements which differ between clients based on the various strategies that the investment advisor recommends.
  • Service continuity. You deal with employees at an RIA who may come and go, but if they leave the firm, there is service and strategy continuity. There is little risk of advisors moving from firm to firm every few years and asking clients to follow them because the “new firm offers more flexibility.”
Why the “Passive vs. Active” Investment Debate is the Wrong Issue

Why the “Passive vs. Active” Investment Debate is the Wrong Issue

The investment industry is embroiled in a “great debate” concerning which investment philosophy is best: active vs. passive management. The debate concerns how the building blocks (asset classes) that make up the portfolio are constructed. The raging question is whether investment advisors should use passive index funds and ETFs as the building blocks or whether it is better to use more active sub-managers or products.

But this “great debate” is a head fake. It misses the elephant in the room. The main issue is NOT whether the investment advisor used active vs. passive building blocks. The issue is whether the investment advisor’s subsequent strategic and tactical allocation decisions with those building blocks, be they active building blocks or passive ones, were cumulatively beneficial or harmful to the investor’s risk and return experience. We have known for decades that the primary driver of the portfolio’s eventual performance is the relative weighting of the asset classes the investment advisor selects, not whether the allocation decisions are implemented using active vs. passive products or sub-managers. An investment advisor could build a “bad” portfolio using only passive products in the same way another advisor could build a “good” portfolio using actively managed products. (Good and bad in the prior sentence is defined by the risk and return characteristics of the portfolio over an extended holding period.)

If 90% of the results will flow from the investment advisor’s strategic and tactical allocation decisions, shouldn’t the effort be placed on measuring the effect of these decisions rather than whether the investment manager uses active or passive building blocks in their implementation? Shouldn’t 90% of investors’ time be spent developing governance processes to test whether their investment advisors’ strategic and tactical allocation decisions were beneficial or not, irrespective of whether active vs. passive products/managers were used to implement these decisions?

If the capital owner is a Business Manager or other fiduciary (individual trustee, ERISA trustee, endowment trustee, et cetera), this practice of establishing several key performance indicators to test the effectiveness of the investment manager’s strategic and tactical decisions is central to accomplishing the fiduciary’s oversight duties.

Following is a link to a white paper that explains these benchmarking best practices.

Link to Benchmarking White Paper

Onward,
Josh Yager | Portfolio PI

At Anodos, we help our clients answer the question, “Is my investment manager doing a good job?” Many of our clients are individual trustees, business managers, ERISA trustees and endowment board members who are obligated to independently monitor the activities of the agents to whom investment duties have been delegated. What makes us unique is this is all we do. We don’t manage money, sell insurance, or accept referral fees. We don’t have a horse in the race.