At one time, only the very wealthy could hire their own money managers. Today, many money managers have lowered their minimum account sizes so more individuals than ever qualify for this service. As a result, CPAs are increasingly being asked to make money manager referrals. What due diligence responsibilities do CPAs have? How can they ensure clients have realistic expectations about what money managers can and cannot do?
While there are no easy answers to these questions, the guidelines in this article should help CPAs ensure their referrals contribute to client satisfaction and add value to the CPA-client relationship.
A CRITICAL QUESTION
Should CPAs make money manager referrals? Most clients need, or would at least welcome, a CPA's objectivity and expertise in helping them select a manager. There are 8,000 money management companies in the United States, with a wide diversity of approaches - active versus passive, value versus growth, sector rotators and dividend yield managers - the list goes on. The number and diversity make selection a complex process that a professional adviser, such as a CPA, is better equipped to manage than most clients. And because CPAs understand a client's needs, they can help identify a compatible match.
Before beginning the referral process - if the client has never used a money manager before - it's a good idea to confirm that professional money management is the best approach. Some people will never be comfortable with someone else making day-to-day buy and sell decisions for them. Clients with less than $250,000 in investable assets might be better off getting help from a reputable stockbroker or financial planner or should consider using mutual funds.
DUE DILIGENCE PROTECTS CLIENT
For clients who need referrals, create a "short list" of qualified money managers. This way the client will make the final choice from a field of good candidates. Information about money managers can be gathered in four ways.
1. Check the disclosure form (form ADV) all managers are required to file with the Securities and Exchange Commission. Part II of form ADV will answer many due diligence questions (see also the checklist in the exhibit on page 45), including fees, investment strategies, research methods, investment products and portfolio manager descriptions. A form ADV for any registered investment adviser can be obtained by calling the SEC at (800) 638-8241 (the cost for each report is $24 plus shipping), or the manager can provide a copy.
2. Study the manager's marketing materials. These usually answer questions about background, philosophy and investment style. Ask to see performance numbers. Pay careful attention to which accounts were included in the performance calculations and to the disclosure period of the results.
3. Find out what others say about prospective managers. One potential source is the manager's current clients. Opinions vary about the value of obtaining references. Since discretion and confidentiality are the underpinnings of a money manager relationship, most people regard that relationship as their private business and may not want to be used as references. A manager who respects this and refuses to provide references should not be eliminated from the search. In any case, a CPA's observations and the manager's overall performance results are more meaningful than a single client's experience. And, publications such as Pensions & Investments and Institutional Investor publish annual surveys of money managers.
4. Interview prospective managers. There's more to be learned from a face-to-face meeting than can be gleaned from glossy brochures, thick performance printouts or third-party opinions.
In addition to the polished presenters who discuss investment philosophy and performance, be sure to meet and talk to the portfolio and account managers who will be assigned to the client's account. …