Selecting an Investment Consultant

Transcription

1 Knowledge Experience Integrity Selecting an Investment Consultant A 10-Step Guide Knowledge. Experience. Integrity.

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3 Selecting An Investment Consultant This publication is designed to assist organizations that are either considering hiring a new investment consultant or are re-evaluating their current one. The range of choices today includes an estimated 300 institutional investment consultants, from one-office sole proprietorships to subsidiaries of global financial firms. Distinguishing which of these firms represents the best fit for you can be difficult. Our goal is to guide you through this challenging process by providing a series of questions you might ask of the consultants under consideration. Knowledge. Experience. Integrity.

4 1. Does The Consultant Have The Experience To Guide Your Organization Through Complex Market Cycles? Institutional memory, which is developed by living through the highs and lows of market cycles, is invaluable to the client. How long has the consulting firm been in business? How experienced are the firm s consultants, research analysts, and client service professionals? Has the consultant worked with organizations similar to yours, and if so, for how long? How do the firm and its people stay abreast of emerging investment trends and new products? Do they, for example, have the resources to conduct research independently, or must they rely purely on an investment manager selling a particular product for their information? How does the consultant ensure that its best thinking is conveyed to its clients? In the course of your interaction with the consultant, have their questions demonstrated an understanding of the specific issues faced by your organization, or are their questions generic?

5 2. What Is The Consultant s Ownership Structure and Business Model? Some consulting firms operate with a single-market model (i.e., 100% of revenue is derived from fees paid by fund sponsors). Other firms operate with a diversified model (i.e., they earn revenue from providing services to a variety of clients). Who owns the company? How focused is the owner on the consulting business? Is the firm managed in such a way that its interests are aligned with its clients? What is the consultant s business model? What are the potential advantages and disadvantages of this model to you? If the firm has a diversified business model, where do potential conflicts of interest lie and how are they managed? What kind of disclosures does the consultant routinely make to clients? What additional information can you obtain upon request? Does the firm have a written code of ethics? If so, how is it enforced? What sort of internal system of checks and balances does the firm embrace so as to mitigate conflicts and ensure client strategies are unbiased? Knowledge. Experience. Integrity.

6 3. How Strong Is The Consultant s Market Research? A firm should consistently conduct research to ensure it is on the forefront in terms of its understanding of the investment universe. Request a list of the original research reports produced by the firm from the prior year. After studying them, do you feel you will be getting in-depth, practical analysis of investment and marketplace trends, investment product innovations, and the experiences of your peer group? Is the research focused on issues important to you? Does the firm employ research specialists in various asset classes? If so, will you have direct access to them, or must all communication be channeled through a single individual? Are researchers and analysts fully dedicated to their functions or do they have additional client-service responsibilities? At some firms, consultants do double-duty as research specialists. If this is the case, are you confident the consultant s commitment to servicing your needs would not be compromised?

7 4. How Well Does The Consultant Understand Investment Managers? It is important you understand how the consultant learns about the competitive issues, strengths, weaknesses, innovations, and business models used in investment management. How does the consultant source its information on investment managers? Does it support a fully dedicated research operation? How much of its research is proprietary, as opposed to third-party generated? Does the consultant s search process demonstrate insight into investment manager businesses? Does the consultant have the experience and access to determine whether an investment manager s results are truly a function of the process it says it follows? What is the consultant s process for investment manager search? Find out if the firm would use a pre-approved list for manager search or a customized one created specifically for your needs. How much does a firm s qualitative knowledge enter into its manager search process? Knowledge. Experience. Integrity.

8 5. How Reliable Is The Data On Which You ll Be Basing Your Decisions? Databases are the foundation of performance metrics and a key factor in manager selection and retention. From what sources does the consultant derive its data? If the consultant develops and maintains proprietary databases, what is their methodology for collecting and validating data? How does the consultant create and maintain valid peer groups? If databases are purchased, how does the consultant vet the accuracy, consistency, and timeliness of the data? Not all data is quantitative. How does the consultant collect and record qualitative insights and share them with clients? Who is analyzing and interpreting data on the client s behalf? Does the consultant have the institutional memory to view the data in the context of long-term market cycles? What does the consultant do to eliminate survivorship bias from its data?

9 6. What Is The Consultant s Philosophy On Investment Performance And Risk Control? The consultant s definition of investment success should be consistent with your own. How does the consultant define successful investment performance? Is success defined by meeting your organization s needs or in comparison to a universe of peers? Does the consultant display a willingness to understand your specific long-term objectives and risk tolerance? How will the consultant measure risk and control it? Does the consultant advise meeting your performance needs with the lowest risk possible or aiming at the highest risk possible? Does your organization s risk tolerance match the level the consultant is suggesting? Knowledge. Experience. Integrity.

10 7. Does The Consultant Have The Conviction To Confront Tough Investment Decisions? Candor is essential to a successful client-consultant relationship. No investment strategy is problem-free. An effective consultant speaks honestly and willingly at all times. Under what circumstances has the consultant recommended a manager termination? How has the consultant justified participation or non-participation in non-traditional asset classes? What would the consultant say has been its biggest mistake? Sometimes the best decision is no change at all. How does the consultant determine when change is warranted and when patience is the better course?

11 8. What Kind Of Educational Services Will The Consultant Provide? You will need access to trusted industry knowledge in order to reach sound fiduciary decisions. What is the consultant s plan for keeping you abreast of industry trends and issues? Does the consultant offer formal educational opportunities such as forums about industry trends, outlooks, and practical research? If so, does the consultant bring in recognized experts from outside the firm or are the programs limited to internal resources only? Does the consultant provide an opportunity for you to meet and exchange ideas with representatives from organizations similar to yours? Does the consultant have the capability and resources necessary to educate you about the primary considerations relevant to helping you effectively carry out your fiduciary responsibilities? Knowledge. Experience. Integrity.

12 9. How Should You Weigh Cost Against Value? It is critical to understand what you will be receiving for your consulting fee in terms of quality and quantity of services. Some firms may offer a full-service retainer that is, in reality, quite limited in scope. Some may offer certain services as projects outside the retainer for a separate fee, while others prefer to provide all services a la carte. Which arrangement is the consultant suggesting? Which consulting services are being included in the fee you are being quoted? How does the cost of a full-service consulting retainer compare to the unbundling of services that focus on your priorities? Will the consultant provide relevant support services, such as: assisting with the development of investment policy statements; searches for investment managers, recordkeepers and/or custodians; evaluation of alternative investment programs; asset allocation/liability analyses; and manager investment structure services? Does the consultant prepare its own reports or do they outsource them to a third-party provider? If they outsource, what priority will your reports take versus others? How frequently will you receive these reports, and how much help will you get in interpreting them? Can you expect in-person meetings to discuss the reports?

13 10. How Compatible Is Your Team With The Consultant s Team? The client-consultant relationship is a dynamic one. It is important that you have a high level of personal comfort with the individuals with whom you ll be dealing. Is the consultant s style conservative or aggressive? Does that fit with your organization? Does the consultant have experience and proven interest in serving accounts similar to yours? Are the consultants pitching your business the same ones who will service your account? Ask to meet the entire team and visit the firm if possible. How often will you have contact with the team, and with whom will you interface? In addition to your primary consultant, will you have direct access to others who are doing the work, such as research specialists? Does the presentation team seem cohesive? Have they worked together on client challenges over a series of market cycles? Does the team consist of employees of the firm or are they shareholders with a strong incentive to perform prudently on your behalf? Knowledge. Experience. Integrity.

14 Conclusion Once you have hired the right consultant, it is important to understand your role in making the relationship function at the highest possible level. Maintaining a strong client-consultant relationship is an active process for both parties. Be prepared to manage your consultant by setting priorities and objectives, approving work plans, sticking with timetables for decisionmaking, and providing necessary feedback and critiques. You can further advance the relationship by making the appropriate staff and decision-makers available to your consultant. Foster new ideas by providing opportunities for strategizing and brainstorming. The more transparent you are, the more opportunities your consultant will have to truly understand your organization s needs, provide their best objective advice and proactive ideas, and ultimately help you protect and grow the assets of the beneficiaries you serve.

15 About Callan Callan was founded as an employee-owned investment consulting firm in Ever since, we have empowered institutional clients with creative, customized investment solutions that are uniquely backed by proprietary research, exclusive data, ongoing education and decision support. Today, Callan advises on more than $1.8 trillion in total assets, which makes us among the largest independently owned investment consulting firms in the U.S. We use a client-focused consulting model to serve public and private pension plan sponsors, endowments, foundations, operating funds, smaller investment consulting firms, investment managers, and financial intermediaries. For more information, please visit

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