driving up costs.
“To get better returns, CIOs might have
to increase the complexity of their investment
structure,” Phinney said.
And if an investment team has a good
track record, what are the chances that they
can keep it up? Talent development is often
overlooked as a key performance metric,
said Salvatore Faia, president of Vigilant
Compliance, LLC, a Chadds Ford, Pennsylvania, compliance consultancy, but it’s
essential for obtaining fresh observations
that can drive results. “Do they encourage
even junior people to offer input and participate in decisions?” That’s doubly important
when a team is led by a star whose celebrity
can overshadow solid process and sustainable
momentum, Faia added.
And be sure that the underlying legali-
ties align with the committee’s responsibilities.
“Investment consultants typically try to avoid
that fiduciary responsibility,” McCaffrey said.
“It’s a big discussion point in the negotiations.”
Bear in mind, too, that once the firm is
engaged, final fiduciary responsibility still
remains with you, the ultimate asset manager.
“You are responsible for finding what fulfills
the investment policy,” McCaffrey said.
That means that success also depends on
your team’s culture, willingness to challenge assumptions and each other, continual
improvement of practices and oversight, and
accountability to fund’s other leaders and its beneficiaries.
New Mexico’s State Investment Council is rapidly rebuilding trust,
thanks in no small part to its rehabilitated due diligence processes.
Moise’s annual letter, published at the council’s website, summarizes
the changes it has implemented since 2010. That’s backed up by
showing the work: the investment plan, strategy, and goals; ongoing
education and operational improvements for the staff; and the fund’s
audits. Winning $38 million back through legal action has helped, too.
Among the best practices the council has adopted:
• An annual investment plan ( http://www.sic.st
annual-investment-plan-2016.aspx) published to the council’s
website. The plan outlines the council’s perspective on economic
conditions and dynamics affecting returns in the context of its
mission and goals. It’s written in plain English and includes
detailed breakouts for the state’s funds, investment categories, and
beneficiaries. Prior to 2010, the council did not publish an invest-
ment plan, and published results sporadically.
• Publishing asset allocations, specific funds, and outsourcing
firms retained ( http://www.sic.st
• Following a stringent RFP process when considering new
managers and vendors ( http://www.sic.st
Any CIO can learn from New Mexico’s hard-won insights,
says Vince Smith, the council’s CIO. His approach: filter options
through the established investment plan and deploy asset class
directors who “know what they’re looking for.” After the basic
interviews and site visits are done, the team pushes beyond facts to
“understand what those facts mean.”
That means analyzing trendlines to determine if the manager
is likely to align with the fund’s investment goals going forward.
And it means discussing commitments to new firms while they are
still on the drawing board - “understanding where the managers’
businesses are progressing,” Smith said. That converts due dili-
gence from an occasional exercise to an ongoing point of view.
With a transparent profile that lets the public view its investment process, New Mexico’s investment officials are essentially
crowd-sourcing their credibility. “It removes a layer of ‘trust us,’
” Smith said. “I’m really seeing the value of other people independently reviewing the information.” —Joanne Cleaver
DC Plans: A Fear of Fees
WHILE FEES are one key consideration in the due diligence equation, other factors—
monitoring and compliance costs, especially – can affect net returns.
The Plan Sponsor Council of America (PSCA) reported that in 2015, 59.1% of
defined contribution plan sponsors paid fixed fees to firms and 35.1% a percentage of
plan assets, while 5% blended the two approaches.
The conversation about fees should be ongoing, not “one and done,” said Stephen
McCaffrey, board chair of the PSCA. Be sure that the negotiated rate is the institutional
rate, not the retail one.
Fiduciaries must be ready to defend the fee structure as “reasonable;” that means
annually polling managers about the current rationale for their fees and what would
prevent them from lowering fees, McCaffrey said. “Ask them, ‘What has changed in
your operation that would allow us to get lower fees?’ ” Sometimes, firms drop fees when
the client account crosses a certain threshold – but they might not apply to your fund’s
situation unless you ask.
Fees aren’t always straightforward, said Doug Neville, who heads the employee
benefits group at St. Louis law firm Greensfelder, Hemker & Gale, P.C. Fee-for-service
is clear enough, but some managers want to collect revenue shares both from corporate
clients and from managers of individual funds, he noted.
“If you’re hiring someone to pick investments for you,” said Neville, “and they get
three basis points from one fund as a revenue share and ten from another, which fund do
you think they’ll recommend? There’s an inherent conflict there. The ultimate goal is to
get enough information so you can agree to a fee structure that eliminates or minimizes
the inherent conflict and ensures that the plan is paying reasonable fees. You have to
keep asking questions until you get a full understanding of how much they’ll be making
from your money.”