Five Questions to Ask Your Advisor: Costs of Portfolio Management

July 24, 2018 |
1 minute read
|

Costs matter. With expectations for lower market returns over the coming years, every basis point of net performance is particularly important. Furthermore, the compounding effect of high fees can significantly impact spending for mission over time, so understanding the true cost of portfolio management is vital, but also a challenge.

One option is simply to invest passively, although over time that has not proven to be an effective approach to achieve a real return sufficient to cover spending draws/distributions. If you elect to combine active with passive strategies and allocate to illiquid strategies, calculating your total fees and costs can be a complex undertaking.

Fees that are directly invoiced are largely understood, but those that are reflected in the NAV (net asset value) of a portfolio such as third party manager fees and fund servicing expenses and other items like audit, legal, and transaction charges are rarely transparently reported. Further, when evaluating OCIO providers in RFP responses, it is critical that criteria like returns and fees are presented in such a way as to ensure clarity and apples-to-apples comparisons.

One of the responsibilities of a fiduciary is to understand the costs associated in their institution’s portfolio, as well as the factors that drive differences in fees and expenses. In fact, UPMIFA (Uniform Prudent Management of Institutional Funds Act) requires that fiduciaries incur only “appropriate and reasonable” costs in managing the portfolio.

We have found that most endowments and foundations significantly underestimate their total investment costs, reporting total fees and expenses of 60-70 basis points historically (Source: NACUBO | Commonfund Study of Endowments). In more recent analysis we observe that total fees and expenses for a diversified portfolio with a 15-20% allocation to illiquid strategies, average 100-130 basis points (excluding incentive fees).

How can you manage your fee budget and better compare potential advisors? Following are five questions to ask you advisor today.

  1. Am I paying for alpha (manager skill) or beta (market exposure), or risk premia? (deconstruct the source of returns)
  2. To what extent are my interests aligned with those of my advisor (are fees structured to properly incentivize the manager)?
  3. What are the specific fund expenses that are reflected in the NAV of my investments?
  4. Is my advisor receiving any compensation from underlying investments/managers, including negotiated manager fees or revenue sharing?
  5. What is included (excluded) in an OCIO fee?

CH_1_Fees_and_Expenses_Cost_Blog



Keith Luke

Author

Keith Luke

Keith Luke

Author

Amy Harlacker

Managing Director, Head of Operations

Disclaimer

Certain information contained herein has been obtained from or is based on third-party sources and, although believed to be reliable, has not been independently verified. Such information is as of the date indicated, if indicated, may not be complete, is subject to change and has not necessarily been updated. No representation or warranty, express or implied, is or will be given by The Common Fund for Nonprofit Organizations, any of its affiliates or any of its or their affiliates, trustees, directors, officers, employees or advisers (collectively referred to herein as “Commonfund”) or any other person as to the accuracy or completeness of the information in any third-party materials. Accordingly, Commonfund shall not be liable for any direct, indirect or consequential loss or damage suffered by any person as a result of relying on any statement in, or omission from, such third-party materials, and any such liability is expressly disclaimed.

All rights to the trademarks, copyrights, logos and other intellectual property listed herein belong to their respective owners and the use of such logos hereof does not imply an affiliation with, or endorsement by, the owners of such trademarks, copyrights, logos and other intellectual property.

To the extent views presented forecast market activity, they may be based on many factors in addition to those explicitly stated herein. Forecasts of experts inevitably differ. Views attributed to third-parties are presented to demonstrate the existence of points of view, not as a basis for recommendations or as investment advice. Market and investment views of third-parties presented herein do not necessarily reflect the views of Commonfund, any manager retained by Commonfund to manage any investments for Commonfund (each, a “Manager”) or any fund managed by any Commonfund entity (each, a “Fund”). Accordingly, the views presented herein may not be relied upon as an indication of trading intent on behalf of Commonfund, any Manager or any Fund.

Statements concerning Commonfund’s views of possible future outcomes in any investment asset class or market, or of possible future economic developments, are not intended, and should not be construed, as forecasts or predictions of the future investment performance of any Fund. Such statements are also not intended as recommendations by any Commonfund entity or any Commonfund employee to the recipient of the presentation. It is Commonfund’s policy that investment recommendations to its clients must be based on the investment objectives and risk tolerances of each individual client. All market outlook and similar statements are based upon information reasonably available as of the date of this presentation (unless an earlier date is stated with regard to particular information), and reasonably believed to be accurate by Commonfund. Commonfund disclaims any responsibility to provide the recipient of this presentation with updated or corrected information or statements. Past performance is not indicative of future results. For more information please refer to Important Disclosures.

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Disclaimer

Certain information contained herein has been obtained from or is based on third-party sources and, although believed to be reliable, has not been independently verified. Such information is as of the date indicated, if indicated, may not be complete, is subject to change and has not necessarily been updated. No representation or warranty, express or implied, is or will be given by The Common Fund for Nonprofit Organizations, any of its affiliates or any of its or their affiliates, trustees, directors, officers, employees or advisers (collectively referred to herein as “Commonfund”) or any other person as to the accuracy or completeness of the information in any third-party materials. Accordingly, Commonfund shall not be liable for any direct, indirect or consequential loss or damage suffered by any person as a result of relying on any statement in, or omission from, such third-party materials, and any such liability is expressly disclaimed.

All rights to the trademarks, copyrights, logos and other intellectual property listed herein belong to their respective owners and the use of such logos hereof does not imply an affiliation with, or endorsement by, the owners of such trademarks, copyrights, logos and other intellectual property.

To the extent views presented forecast market activity, they may be based on many factors in addition to those explicitly stated herein. Forecasts of experts inevitably differ. Views attributed to third-parties are presented to demonstrate the existence of points of view, not as a basis for recommendations or as investment advice. Market and investment views of third-parties presented herein do not necessarily reflect the views of Commonfund, any manager retained by Commonfund to manage any investments for Commonfund (each, a “Manager”) or any fund managed by any Commonfund entity (each, a “Fund”). Accordingly, the views presented herein may not be relied upon as an indication of trading intent on behalf of Commonfund, any Manager or any Fund.

Statements concerning Commonfund’s views of possible future outcomes in any investment asset class or market, or of possible future economic developments, are not intended, and should not be construed, as forecasts or predictions of the future investment performance of any Fund. Such statements are also not intended as recommendations by any Commonfund entity or any Commonfund employee to the recipient of the presentation. It is Commonfund’s policy that investment recommendations to its clients must be based on the investment objectives and risk tolerances of each individual client. All market outlook and similar statements are based upon information reasonably available as of the date of this presentation (unless an earlier date is stated with regard to particular information), and reasonably believed to be accurate by Commonfund. Commonfund disclaims any responsibility to provide the recipient of this presentation with updated or corrected information or statements. Past performance is not indicative of future results. For more information please refer to Important Disclosures.