Several survey respondents have posted comments and questions about evaluating their investment adviser. One respondent asked, “For those actively using investment advisers, [I’d like to know] how satisfied are you with the quality of service you receive?” Another stated “[Provide] more information about assessment of investment adviser performance, factors behind decision to replace, and procedures for selecting a new adviser.”
At RWM, we believe ‘Nonprofits Deserve To Know’ if their adviser’s investment strategy or recommendations are adding value. If you’re not receiving information that enables you to objectively evaluate your adviser, it’s likely you can strengthen policies and governance procedures to make this assessment less cumbersome.
To evaluate your adviser objectively, consider the following:
1. Set and stick to a static blended policy benchmark (BPB)
Just as in a scientific experiment, the BPB serves as the “control.” Any comparison to the control reflects the gain or loss resulting from a decision to be different than the control.
Your BPB should:
– Contain a high-level blend of broad market indexes that align with your investment policy asset class targets
– Be outlined in your investment policy statement
– Remain constant or static
– Always be included in your investment reporting
Other benchmarks can serve different and meaningful purposes, but they need to be in addition to the policy benchmark, not instead of it. Having a static “stake in the ground” BPB is critical to clarifying performance expectations and making accountability possible.
2. Decide in advance the circumstances under which your adviser will be replaced
In the 2016 SONI survey (data as of YE 2015), we asked survey respondents to indicate what level of underperformance in relation to a suitable portfolio benchmark they deem reasonable for an investment advisor over a five-year period.
The results varied from no degree of underperformance is reasonable to underperforming by 2% is reasonable. You decide what is reasonable for your organization. Whenever emotions have the potential to cloud judgments, nonprofits will be well served to leverage simple, clear policies to guide decision-making. Outlining such policies in advance of a troubled scenario will save your organization a headache down the line.
3. Improve the clarity and transparency of your investment reporting
Does your investment report display dozens of pages of market predictions with dizzying charts and graphs followed by many pages of portfolio performance, activity, and position detail? If so, you may find it difficult to understand if the investments are in line with your policy and performing as expected.
The following information should be clearly stated within the first three pages of your investment report:
– Overall performance in relation to your BPB
– Actual overall asset allocation in relation to policy targets or ranges
– Verification that other policy guidelines are in compliance (particularly those related to diversification and fixed-income credit quality and maturity)
Asset class and position level performance and risk measures, and market commentary and forecasts are important, but they are best addressed once high-level performance and policy compliance are verified as in line.
4. If conditions warrant considering a change, conduct a request for proposal (RFP) for an investment adviser. Keep it simple— an RFP process doesn’t have to be onerous. Consider what is most important to you and ask several different types of advisers to address your needs. Avoid using someone else’s lengthy template and stick to the basics:
– History and experience
– Business structure
– Affiliations/conflicts of interest
– References (similar to your organization) and representative client list
– Actual aggregate client performance (not hypothetical or model results)
– Fees and expenses
– Sample reports, communications, and educational material
– Fiduciary status
Quantify participant responses so you can select and interview finalists. Document the process along the way to verify that you’ve avoided conflicts of interest. If you have a clear blended policy benchmark that identifies the portfolio’s performance expectation over any time frame, you’ll eventually know if you made a good decision. If you have a clear policy related to the degree of underperformance you’ll tolerate, you’ll also know when it is time to do it again.