Whether your organization is searching for a new investment advisor or just doing a periodic review of the current financial service provider pool as part of your fiduciary responsibility, creating a well-designed Investment Management RFP (Request for Proposal) can actually help you make a more informed decision.
Why is an RFP so important? For one thing, an effective RFP asks questions that are important to your organization in a standardized format so you can easily do a side-by-side comparison of investment managers. This is important because, left to their own devices, many firms will “spin” their proposals to tell you what they want you to hear, while de-emphasizing details they prefer you not ask.
In addition, requiring managers to submit a standardized investment management RFP can help demonstrate that you used a formal, thoughtful process to conduct your search. The detailed format of an RFP shows that you’re serious about meeting your fiduciary obligation. It also provides important historical information to those who may follow you on your organization’s investment committee and board of trustees.
In general, the primary focus of a solid RFP should be on the three Ps: People, Process, and Performance. To this, you should also add detailed information on how the manager is compensated, and any other value-added services the manager can bring to your relationship.
People: In this section of your RFP, you’ll want to gather information about the history of the firm and its principals. Ask about the relevant experience and education of the important decision-makers. How committed is the firm to the non-profit community, both from a business and a personal perspective? You should also ask about the firm’s ownership structure, professional staff turnover, and its history of litigation and regulatory action. Reputable firms won’t hesitate to share that information with you.
Process: Investment returns without a replicable process to generate them are worthless. You want to hear that a firm has a well-reasoned investment philosophy that is grounded in science, not science fiction. Ask for details about the firm’s investment approach. Does this approach resonate with your investment committee and board? Does the amount of financial risk the firm suggests for your organization feel comfortable to you, as a fiduciary? Ask questions that help you understand how asset-allocation and security-selection decisions are being made or will be made, both at the firm level and with respect to your organization’s portfolio.
Performance: Investment results provided by the managers under consideration should be that of actual clients, both past and current. If possible, the results should be both net and gross of all fees and expenses so you can see the impact of fees and expenses on the return. The longer the track record the firm can provide (10 years, for instance, rather than two years), the better. That way, you can judge a manager’s performance through both good times and bad. The data should include appropriate benchmark(s) and risk statistics that place the results in a proper context. Of course, all managers will have periods of underperformance, but are the firm’s returns aligned with expectations for their approach? Can they identify the fundamental drivers for their relative performance in terms you can clearly understand?
Compensation: There are a variety of business models within the financial services industry. You must have a clear view of how your manager is compensated for his/her work, and what potential conflicts of interest that compensation arrangement might cause, . This includes knowing whether an advisor’s compensation is in any way tied to the recommendations it makes and the products it uses. Ensure that each firm gives you the “all in” costs to manage your organization’s investments. How does this fee compare to alternatives available to your organization in light of the services you’ll receive?
Other services: Your nonprofit may not have the resources to hire additional, external consultants to help with the important, non-investment aspects of managing an endowment. These services might include developing investment and spending policy statements, modeling strategic financial plans, and developing planned giving strategies. Ask, as part of your investment management RFP: Can these prospective investment advisors assist you in these critical areas, too? Will they bundle these services in your “all in” costs or will they cost extra?
As you can see, taking the time to craft a solid RFP for your next investment manager search can pay off handsomely in the long run. A good RFP helps streamline your selection process, provides you with a greater understanding of the firms being evaluated, and gives you the information you need to make decisions that are consistent with your fiduciary obligations.
As an independent, fee only investment advisor, we are naturally biased towards the fee only advice model. There are many compensation models in the investment management industry and you should select the one that best meets your organization’s needs .
Important disclosure information
Please remember that different types of investments involve varying degrees of risk, including the loss of money invested. Past performance may not be indicative of future results. Therefore, it should not be assumed that future performance of any specific investment or investment strategy, including the investments or investment strategies recommended or undertaken by RegentAtlantic Capital, LLC (“RegentAtlantic”) will be profitable.
Please remember to contact RegentAtlantic if there are any changes in your personal or financial situation or investment objectives for the purpose of reviewing our previous recommendations and services, or if you wish to impose, add, or modify any reasonable restrictions to our investment management services. A copy of our current written disclosure statement discussing our advisory services and fees is available for your review upon request.
This article is not a substitute for personalized advice from RegentAtlantic. This article is current only as of the date on which it was sent. The statements and opinions expressed are, however, subject to change without notice based on market and other conditions and may differ from opinions expressed in other businesses and activities of RegentAtlantic. Descriptions of RegentAtlantic’s process and strategies are based on general practice and we may make exceptions in specific cases.
RegentAtlantic does not provide legal or tax advice. Please consult with a legal and or tax professional of your choosing prior to implementing any of the strategies discussed in this article.