Eeny, Meeny, Miny, Moe









Eeny, Meeny, Miny, Moe

I recently had a prospective non-profit client share a few of the “decision points” his investment committee was concerned with in regard to their investment process. He said that the committee was debating whether they should hire a firm whose marketing focus was both national and specific to his organization’s market niche, or a hire a local firm. He also told me that they were trying to differentiate between hiring an investment consultant or an asset manager. These decision points inspired me to blog on the pros and cons of each.

National vs. Local

Many, many years ago, when I was just starting out in the world of finance, a prospect told me that he would not consider becoming a client until we met face-to-face. I appreciated this sentiment and after arranging to meet (He was in Texas and I was in NYC), we found that we shared common interests and philosophies, and I am happy to say that our friendship and business relationship has lasted to this day.  It is a relationship largely been conducted by telephone that has grown and grown to this day. So I am always a little puzzled by the desire to hire someone “local”. What exactly are the advantages of hiring someone whose office is just across town?

  • Perhaps they understand us better as neighbors?
  • We can go over and see them whenever we want?
  • We like to support local businesses?

My client from Texas might have been inclined to do business locally as well, but he was guided by an internal process that did not assign a high value to a local relationship. While I am sure that if he found that a local firm was superior or maybe just equal to my firm in terms of professional qualifications and capacity to customize his experience, there is a fair chance he would have picked the local firm. But his process looked to identify strengths that would translate into better performance and a better experience for him. The fact that I was not down the block mattered only in a tie-breaker.

My client’s decision process was not documented in the manner in which most organizations memorialize their Investment Policy Statement. But in fact his process represented policy. This entire line of thought goes to the importance of Policy. Policy is designed to provide guidance in decision making. Under the heading “Criteria for Selecting a Consultant/Manager/Advisor …etc.” would you likely find a provision to hire a local firm? What exactly would be the rationale for that and how would that rationale relate to the best interests of the organization? Would that rationale honestly survive a conflicts of interest test?

What advantages might selection of a national firm with significant experience in your domain (private school, liberal arts college, Life Planning Community) have? One would expect a higher number of CFA’s and graduate degrees. Additional consulting services that are specifically tailored to the affinity group’s needs would also be a plus. Shared knowledge of approaches to asset allocation among the group’s members would be a valued benefit. Knowledge of your peers’ operating financial performance, its impact on allocation decisions and their view of investment time horizon would be helpful as well.


Investment Consultant vs. Asset Manager

An investment consultant can be an invaluable resource to a non-profit with a mix of significant assets and liabilities. This is largely due to the fact that a good consultant will be primarily focused on the investment process. While you cannot guarantee that all your decisions will be optimal at all times, you can ensure that the framework for making those decisions is sound and prudent.

Investment committees are fiduciaries. If you get policy right, the rest will follow. And a sound and prudent process lies at the heart of fiduciary responsibility. The first step in an investment process is a carefully designed Investment Policy Statement.

In terms of a widely acknowledged hierarchy of relevancy, Policy precedes asset allocation decisions, which in turn precedes the selection of individual managers to implement that strategy. So you can see where we’re going here…Why would you start with a third order element of the investment process, the asset manager?

Some experts say that asset allocation is the most important driver of performance. Will an asset manager be influenced by personal interest in the allocation to categories (i.e. will a US equity manager recommend more or less to proprietary products than an independent consultant)? Further, what are the chances that the asset manager is the best choice in each of the asset categories that have been decided upon? And what about the reporting process? If the asset manager underperforms, will portfolio review evolve into a rationale for retaining the asset manager? Where will the independent outside expert voice come from?

Part of Policy is the obligation to continually assess and refine, reflecting the importance of Investment Policy as a “living” document. Policy is the centerpiece of the process that the consultant is retained to help you manage. Investment consulting is more about being on the same side of the table whereas asset management is principally transactional. Bottom line, when the interest of the organization is front and center a sound and prudent process trumps all else.

About Jim Jeffery, CFA

Jim Jeffery, the founder and principal of Jeffery Asset Management has joined Procyon Partners as Managing Director where he will lead the non profit senior living effort. Jim is a Chartered Financial Analyst (CFA) with more than 20 years experience in the financial services industry. Have a question about your financial plan? ASK JIM

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