This discussion highlights key considerations for managers seeking approval and distribution in both consulting and private wealth. We cover the ways institutional managers benefit from their scale and established processes, while successful private-wealth-focused managers have a deep understanding of the advisor market and maintain frequent, flexible communications suited to intermediaries. Preparation, awareness of a consultant’s processes and competitive fee structures can help boost a manager’s standing with both institutional and private wealth consultants.

Podcast Transcript

Speakers

David Pappalardo, Senior Vice President, Advisor Solutions Group
Peter Sullivan, Vice President
Alan Kosan, Senior Vice President, Head of Strategy and Communications

Podcast transcript

Speaker: Welcome to Advisor's Edge, a new podcast for financial intermediaries designed to keep you abreast of what's new and what's next in modern wealth management. In each episode, top experts in the field will share the latest intelligence on market trends, asset allocation, due diligence insights, and more. It's part of our Smart series, highlighting new thinking from Segal Marco Advisors' research and trends, helping you make more informed decisions.

This podcast provides information from reliable sources, but no guarantee is given for its accuracy. It is for general education purposes only and not intended as legal, tax, accounting, or investment advice. It does not constitute an offer to buy or sell securities or investment products. Consult your own advisors before making any decisions. Segal and Segal Marco Advisors are not responsible for any actions taken based on this podcast. Now, let's dive right in to today's episode.

David Pappalardo: Hi, everyone. This is David Pappalardo from the Advisor Solutions Group at Segal Marco Advisors. Thanks for joining us today. I'm joined by my colleague Peter Sullivan who works as part of the ASG team. He's been with the firm as a senior consultant for 15 years. We're fortunate to have our other colleague Alan Kosan with us, who's the head of strategy and communications. Alan's been with the firm for 20 years, and for the last 15 years of his tenure was running our manager due diligence team.

Alan and Peter, thanks for joining. The topic that we're going to talk about today is engaging with an institutional consultant due diligence process. It's something that we deal with both from the institutional side of the business, but also the private wealth side. I think before we really jump into the details, a couple of things to level set. From our perspective, particularly from Peter and I's perspective, when we're working with managers that are coming from the private wealth side to engage with our due diligence team, they're obviously trying to access the team so that they can get approval and hopefully help with distribution of their strategies. Now, that also obviously applies for institutional managers as well.

But where the interesting nuance comes in is that in working with financial advisors as part of our private wealth practice, a lot of these advisors are working with managers that perhaps we don't know about or have not before. They make an introduction if they've had a good experience with those managers and they'd like us to engage with them in our institutional due diligence process. There's some pitfalls and some best practices that we'd like to get into and talk about with our group here today.

As you'll hear, there's some distinctive advantages and disadvantages whether the firm that's engaging with us has a heritage has an institutional manager, or if they've really grown up servicing mainly the financial advisor side of the business and now we're trying to engage with the institutional consultant, like Segal Marco Advisors.

With that, I'll turn it over to Peter, who's going to talk a little bit more about the advantages and disadvantages, a different perspective for an institutional asset manager engaging with us, and also looking to access the private wealth side of our business. Peter?

Peter Sullivan: Thanks, Dave. I think one of the primary advantages that asset managers that have an institutional DNA have in undergoing our process is that it's largely tied to the scale of the organization and the role that consultants play in the sales and marketing or the distribution of a fund or a strategy to a target client base. Consultants are very important as potential gatekeepers in addressing that market opportunity. As a result, they're generally geared to what is largely a data-intensive underwriting process conducted by a consultant.

Probably the easiest way of underlining that is the role of a request for information, which is often formal. They, as an organization, institutions are geared and built to handle that and handle that at scale, they can do it efficiently. We see the advantages in the fact that they do have ready answers to the typical questions around firm and strategy. They tend to have the documentation and support underlining the answers to various factors that consultants will consider in underwriting and recommending a strategy to its client base.

They also have generally geared and have invested in people that are really prepared to discuss the strategy. These are client PMs, these are product specialists, these just are experts that are dedicated to the sales and marketing aspect and can support the engagement of consultants. What they have is, in terms of advantage, is that they can minimize the disruption of the underwriting process that the inquiries and due diligence conducted by the consultant on their organization. Which means the portfolio managers, the investment decision makers, the ones that have a very serious job on an ongoing basis are less needed in the underwriting process and can be supported by dedicated personnel.

The other aspect, in terms of scale and investment, has to do with having the basic collaterals in place for that underlying process. In terms of marketing their process, the process itself addressing institutional questions from a consultant really does give them an advantage. They get the same questions over time and as a result, their story becomes more marketable, easier to communicate, and effectively get this access to the institutional marketplace through the form of a recommendation or a formal rating and sign of approval. Again, to the benefit of that asset manager.

David Pappalardo: Great, Peter. Thanks for that. I'm going to cover now from a wealth manager perspective. This is something that, given the fact that Peter and I focus a lot of our time working with financial advisors and RIAs and family offices, we do get a fair bit of recommendations for managers to engage with. We've done that as a firm for over 25 years at this point.

One of the things that you'll see as I go through some of these points is that it's really almost a mirror image for some of the things that Peter was talking about from the institutional side. As an example, for a wealth manager that's focused in working with advisors, their advantage is that they certainly know their market. They're used to talking to advisors, engaging with advisors, knowing what the pain points are for advisors, and really to appeal to that marketplace. Which is, in many ways, separate and distinct from the institutional side. They typically will have all of their communications structured to follow the operating rhythm of the intermediary space. Meaning unlike the institutional side, which is focused really on a quarterly process of distributing information, it really is much more frequent, much more available, and in many ways ad hoc in the private wealth space, being able to address questions on an ongoing basis. That is a huge differentiator and advantage that some of these managers have.

Then also, from a vehicle standpoint. As you might expect on the institutional side, many firms have large separate accounts or co-mingled funds that are available. Whereas in the private wealth side, the minimums for those types of vehicles are far too high, so you need access to mutual funds or lower minimum separate accounts. Obviously now, with the advent of evergreen funds and interval funds, we see a lot more of that now and that's evolved over time.

From a disadvantage standpoint, this is really something that is glaring, and luckily is diminishing I think over time. At least, in our experience. What you do find sometimes is that managers in this space that are finally engaging with an institutional manager in a due diligence process, they're frankly just not prepared from an information standpoint and a staffing point. Usually, the first thing we do is we send them out a due diligence questionnaire that can be pretty comprehensive about the firm, the strategies, the staff, their investment process. In many cases, we have firms that are relatively small and they don't have the staff or the experience to really fill those out in a way that would be satisfactory for us to get our due diligence process going. That really is where the process can end right there for many cases.

As I said, that's evolved over time and has improved. But also, sometimes if they get past that point, our due diligence team wants to engage with the portfolio managers, the portfolio management team. In some cases, they're not available or they're not able to travel to talk to our staff. Obviously, with technology over time, that's become a little bit less important. But still, being available and being used to talking to institutional consultants, answering questions about how the firm is fundamentally looking at managing assets, for positioning their portfolio, for going through the portfolio in the level of detail that is required from an institutional due diligence process is something that a lot of these firms are not used to and can really take them aback a bit. That's something that we've seen quite a bit as well.

The other thing that's important is that some of these firms, if they're small enough and they really haven't dealt with a lot of consulting firms, they don't have a consultant relation staff, which is a critical component to be a liaison between the portfolio management team and folks like consulting firms. Not having that staff in place can be difficult for messaging, for communication, and really for setting up meetings between the team that's managing the assets and then the due diligence people on our side that want to engage and have a growing understanding.

Now, what I'd like to do is bring Alan into the conversation. Given Alan's decades of experience in meeting with managers, I think it would be interesting and useful to hear from Alan about what are some best practices that he's seen over his time for essentially rules of the road for things that managers should be thinking about if they're engaging with an institutional due diligence process. Alan?

Alan Kosan: Hi. Thanks, Dave. Appreciate that. I think one of the things to keep in mind is that when you're meeting with an institutional consultant, the research team gets numerous requests daily, weekly, however for meetings. Some firms have an open door policy, they meet with managers regularly. Some are more selective because it becomes a time issue in terms of how much time they can dedicate. What you have to realize is that a firm like ours, for example, who could have up to 1500 manager meetings a year, it's really important to try to distinguish yourself from a skillset, from a value add self, and from a perspective of how are you helping our clients achieve their investment goals.

One of the things of the rules of the road that I think is critical is every manager, asset manager who is presenting themselves to our firm for consideration would be advised to be prepared for every meeting, well-prepared for every meeting. What does that really mean? It means do your research on our firm to the extent that that's possible. Whether it's our website, or the trade press, or word of mouth, or any things that have been posted to public plan-sponsored websites. You do your best to figure out what it is that we do, who do we represent, and most importantly where revealable, what our process is.

It's been several times I've ran into managers who have told me at conferences or get-togethers that they're good, they're good with such-and-such a client because the field consultant, and these are folks who work not necessarily in our headquarters but are dispersed throughout the country, working with clients directly, have had a meeting with them and they think that they're good to go. I've advised them that they would be better suited to truly understand our process because while a field consultant might be attracted to a certain strategy or firm, it still has to be vetted from a fiduciary perspective through our research process and approved through our oversight mechanisms.

For example, we have a seven-factor or principle methodology that we apply uniformly across all asset classes and across all managers to determine whether or not a manager has met the standards that make them eligible for client capital. It is one of the largest responsibilities that we have. In that spirit, it would be advisable for any manager looking to acquaint themselves with us and determine how they map with our process is to understand our process. What are the factors? What do we evaluate on the basis of different situations? I think that's helpful for them because they can then gear their conversation with us around those core themes.

For example, one of our elements of our process factors is the organization. Another is the team. Another is strategy. Another is performance. Another is terms. Another is operations. It goes into that kind of realm. It would be advisable for them to look at that if they can and understand, well, how does their organization meet our standard? Our standard is publishable in different, as I said, forums. Not necessarily posted everywhere, but it's certainly retrievable. We pride ourselves, for example, on organization to look at what is the culture of the firm that we're meeting with? What is their stability? How do they retain and attract talent? It's very important I think to be prepared.

I think it's also very important when you come into an encounter to be able to express the value proposition of your firm and of your strategy to the best of your ability. Make it understandable why you're attractive or could be attractive to our book of business and who we represent, what are the things that are most important to them. Clearly, in times when markets are volatile, what kind of volatile-suppressing approach do you have? For example, it's just one thing. In a time where there might be a search for alpha and there's a high concentration of strategies or stocks that are driving the indices, where do you find alpha in your space? How do you differentiate yourself from your peers in terms of your ability to meet or exceed the benchmarks that you're working with? What is your competitive advantage? What do you think is something that we should be thinking about in terms of investing with you, in terms of what do you really bring to the table in terms of your peers and how do you distinguish yourself in that regard?

I think it's important also in the social aspect of this and the discourse that you have with research people to be friendly and to be open and approachable, but always be professional. We've had certain situations where folks have come in and we know people in common and there's an excessive level of chumminess that they're trying to engender. I don't know if that always works really well. It distracts from the mission at hand because, again, we have only so much time we can spend with managers and it's really important that you use that time effectively. Certainly, developing a personal connection, a professional personal connection with your counterparty, our research expert is important, but get to the business. That's really also very important.

One of the themes that I think continues to come up and we impress upon managers to prepare on before they come in is the cost of services. Our clients are very savvy and are very aware of cost, and fees, and alignment of interest. It's important that a manager comes in and appreciates that and does their best to be competitive from a cost structure, and also being flexible where possible from a cost structure.

Although client servicing is something that is not let's say front and center of every encounter when doing our due diligence, I think the ability to communicate how a firm is prepared to handle client requests for information, communications, reporting, all those things are very, very important, particularly when you have an issue. One of the things that I think is our pet peeve is particularly when we have a client with a manager that's coming in to see us is we don't like to read about things in the press. It's important that, if you want to establish a relationship with a consulting firm that keeps you on their radar, is to continue to update them on not everything that happens, but certainly things that are important. Particularly getting ahead of a story that might be in the press where you think that maybe some explanation would be very helpful.

I think it's useful, just in sum, to know your audience, know what we do, who we do it for, and how we do it. When you can get your hands, or at least inquire before a meeting, another tactic would be send an email to the person you're meeting with and trying to say, "What are the things that you want to cover? What are the things that are most important to you?" If it's an introductory meeting, it's one level of conversation about who you are, how do you look at markets, how do you find alpha, the things that I mentioned. If it's a repeat meeting or a deeper due diligence meeting where it's now getting into performance attribution, it's getting into headwinds, tailwinds of your strategy, it's about the operational compliance that you bring, then there's another set of questions. It doesn't hurt to reach out to your, once you get the appointment, to say, "What are the things that are most important to discuss?"

I think those are the critical things about meeting with managers, and being really open, and honest, and transparent. And be willing to acknowledge where things have not gone well in your performance history, and/or if your firm has had some situations where there's been some dislocation. Whether through people coming and going, or a capital event, or a lawsuit, don't hide from that. Just be clear and honest about what is going on and the status of what is going on. I think that openness and transparency will really, really pay dividends. But I think in the end, you have to realize that if you're a new manager to our process, you want to get on radar. You are potentially an additive strategy to a client development or client program, or you're looking to replace somebody that's already been approved. In that spirit, it's important to understand what you're up against so it's really important to bring your A game, but also to think about it from the perspective of who we represent and how you can best help them.

I'll pause there and see if there were any thoughts, Dave, that you or Peter have.

David Pappalardo: Yeah. Alan, thank you very much. That's super helpful. I did actually have something I wanted you to comment on. I know from meeting with different managers and taking manager calls, particularly introductory calls, one thing that you see a lot of variety with is who the management firm is choosing to put forward. Sometimes it's a salesperson, other times it's consultant relations or a client portfolio manager, versus someone that's actually managing the assets. Maybe if you could comment on ideally who you would like to talk to depending on what type of meeting it is I think would be interesting.

Alan Kosan: Thanks. Yes, of course. That's a good observation. One thing I would say is when we do have meetings where there is a sales or marketing rep, person. I say rep, it's a representative that's either third party marketer, which we really don't see as much as we used to in the past, or a member of the firm who is business development oriented, consultant relations let's just say. And a portfolio manager with them. If those two show up, the portfolio manager's time is very limited sometimes to make these meetings so you will have a business development person and perhaps what's called a product specialist, a person who is designed to convey and communicate the strategy clearly of a product. Everything I just went through, their portfolio attributes, the headwinds, tailwinds, the critical ratios that assign itself to that strategy. They're as well-versed in the strategy of the product as is the PM, but they're not the ones necessarily pulling the trigger and making the actual buy-sell decisions.

When you have a meeting with a marketing or business development and a person who is either a product specialist or a portfolio manager, when they occupy the chatter too much, that's usually not a great situation. You really want to let the person speak who really knows more about the product than the person who is really just a relationship person to keep that dialogue open and going. I think what we like to see is either the product specialist or the PM themselves who can really tell you about the holdings. Really tell you about how ideas are developed, manufactured, and installed in portfolios. What does that mean? How do they make trade-offs? How do they make a buy decision? How do they make a sell decision? It's important to know lessons learned, that's critical in our evaluation on due diligence, the exercise. What have they learned from their wins and what have they learned from their losses?

That critical detail will really help illuminate the competitive positioning of these firms in terms of their skill and their ability to adapt. If it's someone who is just looking to perform an introduction and can tell you at a very high level what they do, about the firm, and about the product, that usually could be a consultant relations person or a business development person. They serve a very valuable purpose, particularly on the servicing side and for an introductory call. But if you really want to learn about the product and whether it makes a difference and it's something that should be going to step two, which is a deeper due diligence dive with things that I mentioned just a few minutes ago, you need somebody who has absolute domain expertise on the product, and the strategy, and the firm, and the resources that they bring to bear.

The most important thing really, well, one of the most important things really is for the PM or the product specialist to convey to the researcher how do they think. How do they evaluate trends? How do they translate those trends and market developments from a macro and a more micro level into the decision making that they're doing? How do they underwrite assets? They really need to convey that. They need to do it with clarity and with a way so that the researcher can understand it.

I think one of the things, Dave and Peter, that do happen is sometimes you have ... Some portfolio managers have a little bit of intellectual superiority to them. They talk over the heads of someone who has, let's say more limited years of experience who are in the room, whose responsible for really getting their first impression. I don't think this is about a dumbing down or a babying of any stretch, but it's just know your audience. You can certainly impress people with your acumen, you don't have to make them feel diminished in how you convey your thoughts or even how you respond to questions. I think it's really important if you want to get traction in the consultant community and be taken seriously as an idea, as an opportunity to really know your audience and to really know your product.

David Pappalardo: That's very helpful, Alan. Thank you. I wanted to just go back to you mentioned communication. It made me want to add a couple of points. As you're relating as an asset manager to a consulting firm, I think it's really important when you're focused on communications that you're doing it broadly across the board with our firm and doing it proactively. Alan mentioned wanting to make sure that if there's anything in the press, we don't want to hear anything in the press, we want to hear it directly from the managers and hopefully a little bit in advance, or at least directly from the firm.

I think as we think about it in managing a private wealth practice, a lot of what that goes through in our mind is mutual fund closings, as an example. That's something that we've seen over time, where the majority of the firms in the industry do a great job where if they're thinking about it, it's something that is going into effect, they give us a lot of lead time. There have been some times over the years where we haven't gotten the communication from the managers and there's been lots of apologies, but it doesn't change the fact that we're left with not a lot of time to really do anything proactively with our clients. It really is about communication, being proactive, which helps have a better experience with our clients, with our relationship between the consultant and the asset management community. It's important that the communication is both to our research team that's responsible for working with the asset members, but also the research side if you have relationships with the people like Peter and myself that are working directly with clients.

Alan Kosan: I would also say, Dave, that's really helpful. I would also say two other things really quick. If a manager and asset manager has interesting proprietary research that they think is shareable, they should offer that. It's always helpful to, again, get into the intellectual capital process and what they think is ideas and concepts that are worth sharing and to communicate. I think just being alert to that, understand what drives a professional research unit is very helpful. You can determine how you might be able to assist us in developing our client portfolios. Very helpful.

David Pappalardo: I agree, Alan. Thank you very much. Well, I think we're going to stop here. Thank you, everybody, for your time. We appreciate you listening and we hope that you found this useful and helpful. Alan, thank you for your time, Peter as well. Again, we're the Advisor Solutions Group here at Segal Marco. If you have any questions, feel free to reach out to Peter Sullivan or myself. Thank you, and have a great day.

Yeah. Thanks, Peter. As I said, this is our-