Ensuring Due Diligence for Investment Professionals

Each month, we will highlight trends we hear in conversations throughout our advisor network and identify the risk implications of those trends. We’ll discuss the ways families, and their advisors can take proactive steps to prevent and minimize forecasted and current risks.

Our fourth edition of Risk Threads features an overview of portfolio risk management, but not in the way you might think. To set the stage, we’ll pose the following question: what is the risk in portfolio management? Portfolio risk management is the process of identifying, assessing, measuring, and managing risk within the portfolio. Taking these steps allows you to focus and invest resources to help prevent events that could negatively impact the accomplishment of strategic objectives.

Managing risk within your portfolio is your portfolio manager’s responsibility, but before you can even start managing portfolio risks with your investment advisory team, you first need to make sure that you are collaborating with the right team and/or co-investing with the right people. Prior to engaging with advisors to manage or invest your money, make sure you take the simple but crucial step of conducting background checks utilizing a firm that is well versed in conducting background checks on investment professionals and a firm that understands the compliance issues background checks create.

Often, families rely on recommendations from friends and other advisors. While this is a normal course of action, it is recommended that you take the extra steps of conducting proper due diligence and background checks.  Most investors think a recommendation or two is enough. Additionally, you might even assume that the individual or team is properly vetted if they work at a big-name firm, or they are representing a reputable fund. However, this could be a costly mistake.

Here are a few tips you can employ to ensure you are entrusting the right people, team, and resources with your wealth.  Hire an expert who has experience conducting background checks on investment professionals who can:

  • Conduct a thorough background check of the team: Look for signs of red flags, which can include foreclosures, bankruptcies, adverse media, lawsuits, or a DUI conviction.
  • Check their professional background: Dishonest individuals may try to conceal or falsify their record of employment.
  • Conduct a search on FINRA
  • Search the Investment Advisor Public Disclosure (IAPD)
  • Review their professional designations

While this list is not exhaustive, it is a good place to start the due diligence process as it relates to picking an investment advisor. Remember, background checks are not a one-and-done. Even if you’re currently investing with various teams and funds, implement an annual background process, and make it a part of your annual advisory review. Just like performance, backgrounds change. Investors need to be aware of these changes, as they can indicate that a person might not be trustworthy or the best person to work with. Align yourself with experts who are well-versed in conducting background checks on investment professionals. This is an area where being pennywise and pound-foolish could get you and your financial security into trouble. Don’t leave simple tasks like systematic background checks to chance because doing so could leave you and your family’s financial security exposed.

At Atténuer Risk, our process of building a risk management architecture goes beyond your insurance policies.  We work with you, and your team to build a holistic risk architecture that includes a strategic risk management plan with key performance indicators to make sure risk mitigation tasks are being conducted with regularity.