Selecting an investment consultant

When it comes to selecting asset managers, retirement fund trustees have ample information at their disposal to give them an idea of how to execute the process efficiently. For example, the four Ps (people, philosophy, process and performance) is a common

When selecting an investment consultant to guide their investment decisions, trustees could use the following aspects as an evaluation and selection framework:

The team and not the individuals should be the focus. Focusing on the team’s expertise reduces key-person risk in the event that the lead consultant moves on. Trustees should also ensure that all information pertaining to the fund is kept on a secure shared workspace to ensure ease of continuity.

Staff turnover within the investment consultancy should be reviewed as this is an indicator of the team’s stability. While staff turnover is not unusual, multiple movements within a short time period could indicate internal problems.

The qualifications and experience of the team is important as in order to critically assess asset managers, investment consultants should at least have the same level of understanding of investment markets and instruments as the managers. In this way, investment-related qualifications and experience is useful in assisting the investment consultants to perform their responsibilities efficiently.

The board of trustees should have good insight into the fund’s investment strategy. By asking the potential investment consultants to review and recommend enhancements (where appropriate) to the existing strategy, the trustees will be able to assess the consultants’ competence and depth of knowledge. Also, as your investments are directly affected by local and global market and economic conditions, the consultants should be able to demonstrate a good understanding of investment markets and economic events.

While the conflicts of interest legislation has made great strides in addressing biases arising due to financial incentives, it is still important to assess areas of potential conflicts that could result in consultants favouring a particular asset manager. These could include previous employment, close personal ties and other non-financial and/or financial benefits. Although it isn’t always possible to ensure that no conflicts arise, disclosure is vital where a possible conflict exists.

Lastly, history is littered with instances of retirement investments being lost to unscrupulous individuals or companies. It is therefore vital to consider the investment consultancy’s reputation. Do they use reputable custodians? Do they have a code of ethics to guide their representatives’ actions?

Reputation and client satisfaction

Getting a second opinion is common practice in the course of our daily lives and this should extend to the selection of investment consultants. Trustees should arrange to contact existing clients to assess their levels of satisfaction with the investment consultancy. Are existing clients happy with the advice they receive? Have the selected asset managers achieved the fund’s investment objectives? Do the consultants play an active role in the ongoing monitoring and reviewing of managers or do they simply report back at quarterly sessions?

Investment consultancies often present a long list of their existing clients (and possibly the size of their institutional portfolio). However, be cautious about reading too much into the range and size of existing clients. Simple reasoning would imply that there is an inverse relationship between the number and size of existing clients and the time and effort that can be invested into the unique circumstances of your fund. However, having said that, technology has largely addressed this constraint.

Value and member focus

It goes without saying that the fees charged by the investment consultancy should be competitive. However, more important would be the range of services included in the fee. Quarterly face-to-face report backs (for large funds), ongoing investment reporting, monitoring and reviewing of investment managers should be the minimum. Also, does the consultancy extend its interaction to the members and ultimate beneficiaries of the fund? Do their processes and operations put the necessary emphasis on the members’ needs as the fund exists for the benefit of the members?

In conclusion, while the above factors are not intended to be exhaustive, they provide a basis for trustees to develop a holistic evaluation framework when selecting investment consultants. As is evident, as part of the process, trustees need to do some homework and should not simply rely on a tender document or presentation.