Insights from the experts in investment fiduciary responsibility.

Fiduciary Excellence Part 3: Implementing the Investment Strategy

Posted by Terra McBride, MBA, AIF®, Vice President of Marketing & Professional Development on January 23, 2019

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Fiduciary Excellence Part 3: Implementing the Investment Strategy

We’re more than halfway through the Fiduciary Quality Management System. In my previous posts, we focused on the first two steps to implementing a solid prudent process – Organize and Formalize. The next step is to Implement the investment strategy.

There are three main components to the Implementation stage of a prudent process:

  1. Service provider due diligence
  2. ERISA safe harbors
  3. Investment selection

If there are any key takeaways from this step it’s that due diligence and documentation at every stage are absolutely critical to avoid confusion, or worse, down the road. We have a great webinar on how to implement a prudent investment strategy, hosted by our very own Rich Lynch, that is well worth the listen. Rich goes into great detail on each of the three components of this step.

For the purposes of this post however, I want to highlight just one very important process for implementation – the suggested minimum criteria for choosing investment managers. I personally was impressed that despite what seems to be an ever-shifting regulatory environment, the criteria presented by Fi360 in selecting investment managers has remained largely untouched since the company’s founding in 1999. For something like this to withstand 20 years of political changes, regulatory proposals, market shifts and a Great Recession, it must be solid. So here it is!

Fi360’s Recommended Due Diligence Screens for Choosing Investment Managers

  1. Regulatory Oversight
    Threshold: Managed by a bank, insurance company, registered investment company or RIA
  2. Minimum Track Record
    Threshold: At least three years history
  3. Stability of the Organization
    Threshold: Manager tenure of at least two years
  4. Assets in the Product
    Threshold: At least $75 million
  5. Holdings Consistent with Style
    Threshold: At least 80%
  6. Correlation to Style or Peer Group
    Threshold: Consistent with asset class being implemented
  7. Expense Ratio | Fees
    Threshold: Above 75TH percentile of peer group
  8. Performance Relative to Assumed Risk
    Threshold: Compare Alpha and Sharp Ratio to peer group median
  9. Performance Relative to Peer Group
    Threshold: Compare year performance to peer group median

Plan sponsors and stewards should engage professional investment managers, with assistance from the advisor to the plan. But this clearly is not a “set it and forget it” procedure. The managers must be evaluated and monitored, with a particular eye toward performance and expenses compared to appropriate benchmarks.

Feb. 28, 2019 is National Fiduciary Day! In celebration of the occasion, we are featuring each our Prudent Practices® right here. Stay tuned to the blog throughout this month for subsequent posts that highlight the other steps of the Fiduciary Quality Management System.

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