Step Two: Assessing Operational Firm Risk
Once strong managers have been identified, private wealth managers should personally interview the prospects to evaluate the firms' operational risks. A due diligence checklist should identify custodial agreements, track records, the compliance history and the tenure of the investment staff as crucial elements to vet before proceeding to the last step.
Step Three: Verifying A "True Tailor"
The prior steps are simple compared with this one. The attributes of tailored portfolios are not easy to determine and take considerable time to verify. Be wary of any managers that broadly state, "Yes, we certainly construct custom portfolios" when asked the question. A private wealth manager can "test" the true independence/customization of an investment manager by asking a series of simple questions such as:
Who is your most complicated client?
How many of your clients require above-average structuring time with their portfolios?
What is your definition of an overweight stock?
By asking simple questions like these, a private wealth manager can ascertain whether the manager actually tailors accounts to meet the subjective needs of clients. For example, suppose a client needs a portfolio with carved-out overweight stock positions. The answer to the last question above will disclose the manager's ability to accommodate the client's needs. If the answer is, "No portfolio holds any stock greater than 5% of the total portfolio," they have inadvertently disclosed that they would not tailor that client's account. In addition, the "case study" questioning can be revealing. Presenting a fictional client's circumstances of liability payments to a prospective manager should lead to the liability-matched portfolio. If not, then the manager is not willing to customize.
Future Outsourcing Trends
Expect highly customized outsourcing to continue, because it solves many problems. It offers the private wealth manager access to specialized managers at reasonable costs, and keeps them in the battle for increasing market share by offering the most up-to-date models for asset allocation. From the clients' perspective, outsourcing offers access to non-traditional managers through true custom structured investment management. And if the managers are chosen correctly, clients will have access to those investment managers for specific, personalized solutions to their investment challenges.
Peter C. Andersen is chief investment officer of Congress Wealth Management Company in Boston.