Choosing the right investment consultant
You’ve decided to appoint an investment consultant: but what criteria should you use to choose one? A request for proposal doesn’t have to be long. I recently tendered for an investment consultant in my capacity as a director of an endowment. The RFP ran to one A4 page, and simply asked the candidates to address their strengths in seven areas.
Some valuable questions to ask yourself are:
Does the consulting house have the resources to do what it claims? One person practices have a specific set of risks. Conversely, some firms really do have hundreds of staff, but how much of their collective work will they actually use in their advice to you? On a related note, having an unduly large authorised product list is definitely flexible, but it reduces the attention that can be focussed on each.
Do you prefer “implemented consulting” or “traditional” investment consulting? In an implemented consulting arrangement, the consultant is also the multi-manager. The biggest advantage of implemented consulting is convenience, but this is at the cost of flexibility and potential conflicts of interest.
Where is the price point? Price is important but can be hard to compare on a ‘like for like’ basis. It’s important to assess all investment costs, including indirect costs, trading costs and performance fees — not just the management fees.
Does past performance hold up under scrutiny? Reviewing (claimed) past performance is of questionable value – we are not aware of any published audited results or third-party surveys. What is more, past performance is widely acknowledged to be useful when predicting the future in limited settings only and needs to be analysed very carefully.
What level of reporting is offered? Ask to review samples of potential reporting. Good reporting tends to be fairly short, include actionable comments and address major risks.
Is there a good fit between you and your prospective supplier? Spending time with the people who will be your frontline consultants helps to answer the “chemistry” question; but it’s hard to judge this if your only reference point is a single presentation. Talking to relevant referees can help shed light on both culture and service.
Finally, get an understanding of the firm’s existing client mix. If a consultant has more clients that “look” like your organisation, they are likely to be spending more time thinking about the challenges specific to your sector.
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