Do you need to know what goes into your food and how it is prepared before being presented to you? The ever-increasing pressure on manufacturers and restaurants to disclose such information in light of the global war on obesity and related illnesses answers this with a resounding YES.
Just as you will be concerned about the quality of the inputs and processes involved in producing that product, it is critical that you apply similar levels of diligence when purchasing investment management services. And just as you will be concerned about the quality of the inputs and processes involved in producing that product, it is critically important to apply similar levels of rigorousness when purchasing investment management services.
It is in the nature of every seller to put their best foot forward when deciding what information to show to convince you to make that purchase, with the tendency to hide or water-down negative or adverse information. But it is in your interest as a potential buyer to know as much as possible about the product, especially the negative information, so you can assess the likelihood of their impact on you. To ensure that consumers and the more ethical sellers are not short-changed by the more unscrupulous sellers, various standards and regulations have been promulgated to govern processes, inputs, presentation, disclosure and even marketing and advertising practices for the production of various goods and services, such as the ISO catalogue of standards, among others. These are to enforce minimum disclosures, ensure that products meet minimum quality standards and ultimately, promote comparability among similar products both locally and globally.
Performance is the bait, LOOK BEFORE YOU BITE!
In the investment management industry, the information that will be used to entice you to decide to make a purchase is the performance track record of the investment management firm. This will be encapsulated in the various strategies and vehicles that the firm touts as its areas of expertise. These could be for a particular mutual fund, unit trust, Exchange Traded Fund (ETF), real estate fund, private equity fund, hedge fund or a composite of portfolios managed according to similar strategies, objectives or style.
Know What Goes In – INPUT DATA IS KING!
The inputs into such performance track record include sources of price data for securities, exchange rates, assumptions for valuations especially for illiquid securities or those without active markets, choice of benchmark, calculation methodologies and frequency of valuations and return calculation, portfolio aggregation policies, among many other critical decisions. Each choice that the investment manager makes in each step of the process has a compounding impact on the eventual performance number that is shown to you and your ability to compare such performance with a similar one from another investment manager.
The critical question, however, is that, are all investors sophisticated enough to understand the investment process and to know what key information to demand from investment managers so as to make such objective assessments? Even if they are, will it be practical for investment managers to satisfy all the nuances associated with meeting the individual specific information and data demands of each prospective investor? The logistical challenges of meeting such individual demands make it impractical.
Standards Matter – INSIST ON THEM WHEN DEALING WITH PROFESSIONAL FIRMS!
Is it not important therefore to have common standards governing these critical decisions concerning how your money is managed? And as an ethical investment manager and regulator, is it not in your interest to know that both you and your competitors and industry players respectively adhere to verifiable standards to ensure that the market is not rigged in favour of the unscrupulous manager with questionable, misleading and investor-enticing, practices?
What are your thoughts? What questions do you ask your investment manager about the performance information they present to you? As an investment manager, what practices by your competitors seem questionable or are of concern to you?
What are your thoughts? Do send your comments below.