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.

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.

Investment Governance Best Practices for Business Managers (How to Watch the Hen House)

Investment Governance Best Practices for Business Managers (How to Watch the Hen House)

The Problem:  You are a business manager(1), and it is either explicitly or implicitly the case that you are responsible for monitoring the activities of the investment managers that have been entrusted with your clients’ capital. (If you are not a business manager or disagree with this statement, stop reading. This paper does not apply to you.) The problem is that most business managers don’t have the internal systems, licensure, training, staff support, or time to conduct the independent monitoring functions that their clients expect and the law requires(2).

The Way It Is: In response to this problem, many business managers rely on the current money managers to evaluate their own investment acumen. These self evaluations produce predictable results. The incumbent managers typically report, “We did great! We are above average!” Looking for a more objective analysis, business managers frequently ask a competing money manager to review the portfolio designed by the current money manager. Again this “peer review” has predictable results; the competing money manager reports that the incumbent manager is a knucklehead and that the Business Manager should fire the incumbent manager and higher the candidate manager because they are “above average.”

The Way It Should Be:  It should be easy to answer the question, “Is my client’s investment manager doing a good job?” And it is easy if the business manager takes the time to define what the job is that the investment manager is being hired to do. Good investment governance begins with the business manager helping their client document the outcomes that the investment manager is being hired to accomplish. Not only should the job description include the financial objectives being pursued, but also the parameters or investment principles that the client holds. This job description will include, at a minimum, the client’s targeted rate of return, the anticipated contribution & distribution rate from the portfolio, the agreed upon fee to be paid to the investment manager, the maximum allocation to illiquid investments, a policy regarding the minimum amount to be allocated to a capital reserve (a “bond bunker” made up of short-term, investment-grade bonds), and how frequently and by which party independent monitoring and review will be conducted.

Your Job v. Their Job: Once the “Job Description” has been approved by the client and delivered to the investment manager it is important that the business manager’s role be constrained to monitoring the actual results versus the documented objectives. Too many business managers are willing to accept responsibility for strategic and tactical portfolio decisions which are beyond their contractual responsibility, legal authority, or licensure. It is reasonable for the business manager to have an opinion that their client relies upon, but if the business manager does not  have the legal authority to do so, their personal views should not dictate policy. The allocation, strategy, and tactics are the investment manager’s responsibility, though they must remain consistent with the “Job Description” that has been given to them. The business manager’s job is to be the arbiter of whether the investment manager’s recommendations stay within these defined bounds. If the business manager confuses their job (monitoring and reporting) with the investment manager’s job (investment allocation and tactics), the business manager opens the door for a charge by the investment manager that “the business manager told me to do it this way. It’s not my fault that things went badly.” The investment managers have and will continue to make this claim under oath because in most cases it is true.

The Portfolio Audit: A truly objective portfolio audit is designed to compare the actual outcome produced by the investment manager’s decisions against a series of predefined objectives and key performance indicators. To preserve the independence and objectivity of the review process, the auditor must be disqualified from ever managing the portfolio that is being audited. The auditor should also have a depth of experience and training to conduct such an audit. Knowing how to manage money and knowing how to conduct a portfolio audit are close disciplines, but they are not the same. There are five central questions that any portfolio audit should answer:

  1. Is this portfolio likely to accomplish the desired objective?
  2. Is the return that was realized appropriate given the risk taken?
  3. Is the portfolio reasonably diversified?
  4. Is the advisory fee fair given the portfolio size and objectives being pursued?
  5. Are there any operational risks with the investment manager or their company?

The Admonition: That’s how to watch the hen house. Go and do likewise.

Anodos helps 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.


(1) Typically a hybrid accounting practice providing a variety of related service (accounting, audit, bookkeeping, investment oversight, royalty audit, financial project management, et cetera) for  high net worth clients typically in the entertainment, sport, or other creative performing arts industries.

(2) CalProbate Codes 16052(a)(i,ii,iii) re prudent selection, delegation and monitoring of investment advisory functions.