Tough questions to ask prospective money managers for a family office
Part of the due diligence for investors is getting the answers that give them a high degree of comfort with the manager who will be assuming stewardship of their capital
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Selecting the right money manager for a family office can pay enormous long-term dividends for investors willing to take the time to conduct due diligence to secure the right fit.
Aside from making sure to hire managers with the technical qualifications and standards that have been bestowed upon them by the CFA Institute, and potentially using a performance screen, as well as conducting background and reference checks, the key is in-person meetings, for which family offices should be prepared with some tough questions.
As part of a good due diligence process in selecting a money manager, the family office should have questionnaires with which to collect data to cover what Dan Riverso, chief investment officer at Jesselton Capital Management Inc. in Toronto, refers to as “the four Ps” involving people, performance, process and philosophy.
“As you go through all these interviews, you should be somewhat hard on the managers. Ask them tough questions,” he advises.
People question to ask a prospective money manager
For example, with respect to people, sample questions include whether a senior member of the team has left and if so, why?
Performance question to ask a prospective money manager
Regarding performance, the manager should outline the reasons for any underperformance, and if they continued to hold on to a losing position, explain why they did so, says Riverso.
Process question to ask a prospective money manager
Questions about the prospective manager’s process include whether they have ever deviated from that process and if so, under what circumstances. Or whether that process has been modified over time and if it has, what led to the modification.
Philosophy question to ask a prospective money manager
Regarding philosophy, the family office could ask whether there has ever been a change in the prospective manager’s philosophy, and if so what caused it. “Part of due diligence is also to identify securities that do not match a manager’s philosophy,” says Riverso.
To match philosophies and outlooks, it is important that family offices take the time, energy and effort to interview a variety of money managers and make sure their respective values align, says Leanne Scott, a vice-president and portfolio manager with Leith Wheeler Investment Counsel Ltd. in Vancouver.
For example, the investor might want to determine if prospective managers are involved with philanthropy. They might also want to assess compatibility of attitudes towards issues involving the environment, corporate social responsibility, and corporate governance, says Scott.
Family office investors should feel free to ask questions to determine, for example, the level of importance money managers attach to the safety of employees, or how important it is to have female board representation, she elaborates.
Other questions to ask a prospective money manager
Other sample questions, suggests Scott, include:
- How long has the individual been managing client accounts, and do they manage other family office accounts? (She recommends seeking a minimum of ten years’ experience).
- What is the ownership of the firm? Ideally, there should be broad ownership, she says.
- What is the retention rate of key personnel?
- Can the manager provide client references and sample reporting packages?
- Does the manager have a well-articulated and easy to understand investment philosophy that has remained consistent throughout various market conditions?
- How are fees calculated, billed and collected? Are there any hidden fees?
The ultimate goal of due diligence is for investors to gain a high degree of comfort with the manager who will be assuming stewardship of their capital.