Filed under: High Net Worth Individuals, Personal Financial Planning

By Guest Contributor Scott Severs CFA, CFP

Selecting an investment advisor for an endowment portfolio can be a daunting task for many organizations. Some boards may feel that they lack the investment expertise to begin the process. Others may score high on the financial acumen scale, but either can’t agree on a strategy that makes sense, or have a difficult time prioritizing this activity.

Whatever the reason, here are some suggestions that can help your board get unstuck, select an investment advisor, and proceed with the rewarding experience of managing an investment portfolio properly.

Develop an Investment Policy Statement

Managing an investment portfolio means coming to some agreement about risk and responsibilities. The best way to do this is by creating a document called an investment policy statement (IPS).

Contrary to popular belief, the IPS does not need to be a 20-page manifesto. It can be as simple as one page, if it accomplishes three specific things:

  1. Identifies your framework for risk;
  2. Defines a spending policy; and
  3. States your expectations for the advisor, including requirements for performance measurement and frequency of reporting.

This document should then be shared with your candidates as you move forward in the process.

Write and Distribute a Request for Proposal (RFP)

An RFP is a list of questions that you will ask several investment advisor candidates to respond to. When requesting information from a candidate, it is helpful to receive information regarding:

  • The history and size of the firm;
  • Each team member’s skillset;
  • Experience working with similar organizations;
  • Investment philosophy;
  • Reporting capabilities;
  • Service model and philosophy; and
  • The total fees involved (advisory fees, fund expense ratios, trading and custody costs).

Through submitting an RFP, your goal is to collect information that will help you decide whether the investment advisor understands and aligns with your organizational values and can customize a wealth management solution that meets your needs. We would recommend sending this RFP to five-to-ten firms, keeping in mind that it will take some time to read and evaluate each proposal. You may wish to hear from a variety of firms that offer different viewpoints and philosophies. An independent registered investment advisor will often tell a different story than a bank or broker dealer firm.

Interview Investment Advisors

Finally, after you have received and read the proposals, it will be time to narrow the list to no more than five firms to invite for an interview.

To prepare for presentations, we recommend agreeing on a minimum set of questions that you will ask of all the candidates for comparison. This will be a great opportunity to dig into the investment philosophy and service capabilities of the potential firms. For example, you will want to know whether the advisor utilizes an indexed or active investment approach.

Active managers may charge higher fees, but will also attempt to demonstrate that their approach can outperform market indexes over time. For example, index managers feel that the market is very efficient and outperformance to an index is random and not consistently repeatable.

It is helpful to have at least one active and one indexed advisor involved in the final process. To get the most out of the meetings, we recommend that you lead the advisors in the direction you want them to go by asking questions, rather than allowing them to make an open-ended presentation.

Next Steps

Choosing an investment advisor is a great opportunity to make a valuable difference for your firm. Using these suggestions as a guide, you will be able to proceed with confidence and take positive steps toward ensuring the long-term success of your mission.

Scott Severs, CFA, CFP® is a principal and the Chief Investment Officer at Garde Capital, Inc. Garde Capital specializes in providing investment advice to the nonprofit community. Scott can be contacted at scott.severs@gardecapital.com or 206-552-7903.  

For sample IPS or RFP templates, feel free to contact Scott directly.

This article or blog contains general information only and should not be construed as accounting, business, financial, investment, legal, tax, or other professional advice or services. Before making any decision or taking any action, you should engage a qualified professional advisor.