Business plan

Management of market instability


Technology platforms

Performance reporting, including how portfolios are weighted, and benchmarking comparisons

How the manager's costs impact investors' returns

Examining these items alone can prove a daunting task, much less having to conduct deeper research on more than one manager if multiple managers need to be hired. How can advisors accomplish this examination and still have time to run their businesses? Are there alternatives to doing the due diligence themselves? How do advisors feel about the arduous process, and what methods do they use?

Matthew Potter, CIMC, CFP, a planner with Raymond James Financial Services in Cheyenne, Wyo., says, "Some advisors see an SMA as a new venue for their business and they treat it as a commodity, selling it like a mutual fund rather than using it in the context of a consulting or advisory process. These advisors simply consider the due diligence part of the product offering without examining the qualitative or quantitative factors to be considered. They follow the format indicated by their money manager selection resource, use one of a few preset asset allocation models-the closest fit for the answers on the client profile questionnaire-and produce a mix of managers from the list provided, comparing performance with other managers on the list."

Some advisors maintain their own manager databases in addition to the ones provided by either the broker-dealer firm through which they operate or the third-party platform. It can prove to be an expensive, time-consuming process simply to manage the database, much less to examine each manager on whom data is collected. But, many higher-level advisors and investment management consultants, particularly those veterans holding the CIMA and CIMC designations, enjoy the due diligence aspect of the investment consulting process and feel it adds value. If an advisor chooses to do his or her own manager search and evaluation, for example, here is what advisor and consultant Richard M. Todd, CIMC and principal with Innovest Portfolio Solutions in Greenwood Village, Colo., offers as guidance:

"Our own manager research process is driven by three primary goals: 1. Identify managers with a proven ability to produce alpha; 2. Understand a manager's risk exposure and sources of return in a manager's investment strategy (does a manager's philosophy, process and performance attribution align properly); and, 3. Determine if that alpha generation is sustainable. Are there outside factors, in particular, that would disrupt this success?"

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