Veteran financial advisor Lewis Walker, CIMC, president of Walker Capital Management in Norcross, Ga., and recent recipient of the Money Management Institute's 2004 Pioneer Award, adds an important footnote to the subject of doing personal due diligence combined with using outside sources. "As most everyone agrees, research and due diligence on money managers, as well as ongoing monitoring, is a complex and time consuming process. As a financial planner and an investment management consultant, I believe asset management is a subfunction of a larger, holistic planning process. TAMPs (turnkey asset management programs) provide useful functions in organizing data for comparisons of one manager against another using a uniform yardstick. Data is also in useful form for presentation to a client. Nevertheless, when a decision is made to consider a manager, I contact them, get to know their people, secure their data and whenever possible conduct personal due diligence on site. This is a more holistic method, in my opinion."
An integral part of an advisor's job is evaluating investment manager performance throughout the hiring, reviewing and terminating processes. Ongoing monitoring and careful oversight of the manager, to ensure the IPS is being followed and that there is no style drift, are vital measures that need to be taken as well. For their benefit and that of their clients, every advisor should also conduct ongoing performance evaluation. There are obvious limits to what an advisor can analyze, including returns-based and holdings-based analyses, without more sophisticated tools in hand or the help of a third-party source. Termination of a manager is also a result of intense due diligence, and a process is used to make the decision and follow through with that decision. Says Mendelson, "Manager evaluations are neither all quantitative nor all qualitative, but an ideal combination of both helps convey the story of how well a manager has done, how they did it and how likely they are to do it in the future."
In Conclusion
If the process of selecting, monitoring and evaluating investment managers was like constructing a house, it would be built with the bricks and mortar of science but would rest firmly on a foundation of professional judgment, Mendelson tells advisors. The strength and quality of the decisions in engaging or retaining a money manager are dramatically enhanced by employing a sensible and repeatable review process-no different than following an architecturally sound process when building a house and maintaining the structure once completed. "Employing and retaining investment managers, like any investment discipline targeted for success, requires great initial care and ongoing decision-making."
A good blend of technical expertise and tools, as well as good old-fashioned judgment and personal contact with managers, could prove to be the best approach for successful search and evaluation from the immense talent pool available to advisors today.