With completion of the SEC study mandated under the Dodd-Frank Act, the collapse of distinction in the financial services industry continues down the path set by the repeal of the Glass-Steagall Act in 1999. Competition for wealthy investors’ business began in earnest at that time and appears poised to increase with the adoption of a uniform fiduciary standard. For advisors who want to better distinguish themselves in the marketplace, stepping up due diligence and risk management efforts seems to make a lot of sense.
According to the Center for Fiduciary Studies, there have been four legislative acts that have shaped investment fiduciary standards thus far.
- ERISA – Impacts Qualified Retirement Plans
- MPERS – Impacts State, County and Municipal Retirement Plans
- UPIA – Impacts Private Trusts
- UPMIFA – Impacts Trustees of Foundations, Endowments and other Charitable Assets
Further, the Center for Fiduciary Studies has identified seven standards that are common to these Acts, which are presented below. In this article we will focus on number six: Monitor the activities of “prudent experts.” After all, the ongoing review, analysis, and monitoring of money managers is just as important as the due diligence implemented during the manager selection process.
- Know standards, laws and trust provisions.
- Diversify assets to specific risk/return profile of client.
- Prepare investment policy statement.
- Use “prudent experts” (money managers) and document due diligence.
- Control and account for investment expenses.
- Monitor the activities of “prudent experts.”
- Avoid conflicts of interest and prohibited transactions.
This is not an exhaustive list of monitoring practices; rather
the aim is to highlight three due diligence practices that will help strengthen your fiduciary service to clients.
Expand Monitoring Criteria Beyond Performance
We would argue that it is important for advisors to consider a set of monitoring criteria that extends beyond just returns. Keep track of data points that allow you to monitor risk-adjusted measures, cross correlations, asset allocation exposures, expenses, and portfolio characteristics.
Apply those measures to the roster of managers you use with clients and review regularly to see if all are in line with expectations. Those that fail to meet specific criteria can then be evaluated in greater detail. The monitoring criteria should relate to the due diligence criteria that were defined when originally selecting the investment options.
There are multiple tools available that allow advisors to implement this broader-based approach to quantitative monitoring. This process allows you maintain a well-rounded understanding of each manager, identify trends (positive or negative), and helps facilitate client discussions during