The options for money management services are numerous: mutual fund
companies, registered investment advisors, separately managed accounts,
turnkey asset management programs, brokers, private wealth services,
hedge funds to name a few. These services sell various strategies and
benefits. Some are highly regulated, some are not. Some highly
transparent, some are less transparent. As a founder of a non-profit
organization since 1987 that raises money to run operations and sustain
its mission, we have seen change in Wall Street and change in the market.
Despite a broad and complex regulatory environment, and the fact that most managers have high integrity, public reports of investment management misconduct continue.
If you oversee investments for a non-profit or other entity for which
you maintain fiduciary duty, you must ensure that your organization's
invested money is safe. Here are some questions you should discuss with
your current or prospective money manager. This list is not designed to
find the perfect money manager, but rather to help you and your
organization raise and discuss important questions that can assist you
in your fiduciary duty.
Always begin by asking questions about the leadership of the firm.
- Who owns your company?
- Who is on the board of directors?
- Who manages internal controls?
- Can I see an organizational chart?
- Can I see the resumes of the top five executives and the top five traders?
Ask to meet the top management researchers and traders. Check out each
on Google. Ask if there are any lawsuits pending against the company, or
if there have been any government, SEC or FINRA investigations.
Reviewing the company's latest audit will not only provide you with
important information, it will also send a signal that you are serious.
After examining the audit, have your own accountant and auditor go over
it, and then ask questions about any matters that have come up. Two
crucial but often-forgotten questions:
- Who are the auditors of any sub-funds, and who is on their respective boards?
- Have you performed an audit on your back office?
You should then check into their auditing firm. A sad aspect of the
Madoff scandal was that almost no one actually read his audits, or asked
questions about the unknown firm he was using. Below are some questions
to ask about the auditing firm your investment company employs.
Remember, if there is a problem with the auditing firm itself, its
analyses of the financial health of the companies it audits are
- What does Google reveal about the auditing firm?
- Does the auditing firm have an audit you can see?
- Who else has chosen them as an auditor besides your firm?
- Who owns the auditing firm and who are their board members?
After the leadership and audit issues, should come questions about the
- What fees will we be charged? What do they include?
- Do you have any non-up-front fees that have surprised clients in the past that I should know about?
- What is your estimate of the return on investment of our money, after fees?
- What benchmarks will you be using -- Dow Jones, Russell, NASDAQ, S&P?
- What is your estimate of the net returns on our portfolio compared to the benchmarks you use?
- How will my returns compare to other investment returns in general?
- What will the reports that I receive look like?
- Who will be in charge of our account?
If something goes wrong, it is important that your money manager have
insurance. These are some questions to ask on this topic:
- How much liability insurance does your firm have?
- How much "umbrella" insurance?
- How much umbrella insurance do your auditors have?
- How much liability insurance do they have?
- What is the liability insurance for embezzlement that you have? When does it not apply?
- What is the respective liability and umbrella insurance of the funds you invest in?
- What is your total insurance?
- Tell me about the financial controls on movements of money internally.
- Tell me about the movement of money out of your company. Who controls that?
- Where is your custodial account?
- Which regulatory bodies oversee your firm?
- What types of reports are you are required to file?
- What is your investment strategy for my investments?
- What is the ROI of your investment fund since inception, during the past year, and over the last month all relative to your benchmarks?
- How much will be invested in corporate debt?
- How much will be invested in US Government debt?
- Will we be in mortgage-backed securities?
- How much will be invested in equities?
- How much will be invested in international debt/equities?
- Will we be invested in any swaps of CDOs?
- Will we be invested in real estate?
- Will we be invested in commodities?
- What hedging strategies are you using and what are the fees/costs associated with this?
- How much of my money will be invested in hedge funds?
- What percentage of your research is internal, versus external?
- How do you measure and deal with risk?
Getting the opinions others that have used the firm will be as important
as any of the questions above. Ask for five at a minimum, preferably two
other institutions or individuals currently using the firm, and three
Once your invested assets rise above a certain level, use multiple money
managers to minimize risk, and create a healthy competition to get your
I wish you well in choosing your money managers. Remember, it can be as
hard to hold onto money as it is to raise it.