Selecting the right investment manager is crucial for investors to achieve their financial goals. Issuing a request for proposal (RFP) is a common process used by asset owners such as pension funds, endowments, foundations, and family offices to solicit proposals from investment management firms. An effective RFP allows investors to thoroughly evaluate investment managers on factors like investment philosophy, performance, services, and fees. This article provides essential guidance on how to create an RFP that helps identify the optimal investment management partner. We will cover key sections to include, questions to ask, and tips for developing a robust RFP document.
Clearly state the scope and objectives
The RFP introduction should provide an overview of your organization and investment goals. Be sure to describe the scope of services needed, such as discretionary management of a $500 million equity portfolio benchmarked to the S&P 500 index. Provide an expected time horizon, such as seeking an investment partner to manage this mandate over a 5-10 year period. Clearly stating the objectives upfront allows investment managers to tailor proposals specifically to your needs.
Request information on expertise and experience
A crucial section of the RFP should require investment managers to describe their expertise in the asset class and style you are targeting. Ask firms to highlight similar portfolios they manage to the mandate specified in your RFP. Require data on performance history for comparable accounts over 3-5 year periods. Request details on the experience and qualifications of the proposed investment team that would manage your portfolio. The goal is to understand each firm’s track record in managing money in the same asset class and style.
Inquire about the investment process
Make sure to dedicate a section of the RFP to understanding each firm’s investment strategy and decision-making process. Ask detailed questions about how they would construct and manage a portfolio consistent with your required mandate. Request information on the investment philosophy, research approach, risk management techniques, sell disciplines, and other key aspects of their process. This information is vital for evaluating which firm’s process best aligns with your investment objectives and risk tolerance.
Seek information about fees and expenses
The RFP should require full disclosure about proposed fees and cost structure. Ask investment managers to provide fee schedules and indicate if they are negotiable. Make sure all expenses are clearly identified, such as management fees, custodian fees, commissions, and any other consultant or third-party expenses. Consider requesting fee proposals on an all-inclusive basis to simplify comparisons between managers. You want a complete picture of total costs to make an informed decision.
Request details on service capabilities
Inquire about each firm’s client service capabilities required for your mandate. This could include resources dedicated to your account, reporting frequency and methods, attribution analysis, online access to information, and other services that may be priorities for you. Ensure each firm describes their approach to client communication and keeping you informed about investment activities, risks, and changes in the portfolio or process.
Developing a detailed RFP is crucial for rigorously evaluating investment managers and selecting the best partner for your needs. Taking time to craft thoughtful questions tailored to your specific investment objectives, asset class, style, and risk tolerance will provide the information essential to making a smart decision. Follow the best practice of including sections on expertise, investment process, fees, and services. An effective RFP demonstrates your professionalism and sets the stage for a strong long-term partnership.