Five Questions to Ask Your Advisor:
Costs of Portfolio Management

July 24, 2018  | by Amy Harlacker, Keith Luke

Investment Strategy | Outsourced Investing

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?

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Authors

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Keith W. Luke is responsible for firm-wide client relationship management and business development. In this capacity, he and his team provide OCIO and private capital solutions to nonprofits and public sector investors. He is President of Commonfund Securities, a registered broker-dealer subsidiary of Commonfund and is also responsible for managing Commonfund’s corporate marketing and strategic planning.  Additionally, Mr. Luke oversees the educational programs and research initiatives of the Commonfund Institute. He serves as a member of the Commonfund Operating Committee. Prior to joining Commonfund, Keith was in commercial banking for 19 years, most recently at Citibank, where he held a number of marketing and strategic planning positions in The Private Bank and Corporate Bank. Prior to Citibank, he was with HSBC USA (formerly Marine Midland Bank) in corporate finance and investment banking. Keith earned a B.A. in Economics at Duke University and an M.B.A. in Finance from NYU Stern School of Business.
Keith W. Luke
President, Commonfund Securities, Inc.
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Amy Harlacker heads the Investor Services team and is focused on providing operational leadership and direction and manages the implementation of the organization’s strategic plans and initiatives. Previously Amy led the team responsible for delivering full middle office operational support and service to Strategic Solutions clients. Amy has also held a series of analytical roles within the Commonfund organization across the Operations, Client Service and Information Technology groups. Prior to joining Commonfund, Amy was a business analyst at Energy East Corporation. Amy holds an M.B.A. from Rensselaer Polytechnic Institute and a B.S. in Civil Engineering from Lehigh University.
Amy Harlacker
Managing Director

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Information, opinions, or commentary concerning the financial markets, economic conditions, or other topical subject matter are prepared, written, or created prior to printing and do not reflect current, up-to-date, market or economic conditions. Commonfund disclaims any responsibility to update such information, opinions, or commentary. To the extent views presented forecast market activity, they may be based on many factors in addition to those explicitly stated in this material. 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. Managers who may or may not subscribe to the views expressed in this material make investment decisions for funds maintained by Commonfund or its affiliates. The views presented in this material may not be relied upon as an indication of trading intent on behalf of any Commonfund fund, or of any Commonfund manager. Market and investment views of third parties presented in this material do not necessarily reflect the views of Commonfund and Commonfund disclaims any responsibility to present its views on the subjects covered in statements by third parties. 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 Commonfund fund. Such statements are also not intended as recommendations by any Commonfund entity or 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. Past performance is not indicative of future results. For more information please refer to Important Disclosures.

Disclaimer

Information, opinions, or commentary concerning the financial markets, economic conditions, or other topical subject matter are prepared, written, or created prior to printing and do not reflect current, up-to-date, market or economic conditions. Commonfund disclaims any responsibility to update such information, opinions, or commentary. To the extent views presented forecast market activity, they may be based on many factors in addition to those explicitly stated in this material. 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. Managers who may or may not subscribe to the views expressed in this material make investment decisions for funds maintained by Commonfund or its affiliates. The views presented in this material may not be relied upon as an indication of trading intent on behalf of any Commonfund fund, or of any Commonfund manager. Market and investment views of third parties presented in this material do not necessarily reflect the views of Commonfund and Commonfund disclaims any responsibility to present its views on the subjects covered in statements by third parties. 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 Commonfund fund. Such statements are also not intended as recommendations by any Commonfund entity or 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. Past performance is not indicative of future results. For more information please refer to Important Disclosures.