Schwab Annual Conference 2006

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  • Schwab Annual Conference 2006

    1. 1. Investment Management for the Endowment & Foundation Market What would I expect to find in the way of Best Practices? Duane Lee Executive Vice President Cannon Financial Institute
    2. 2. “ What you cannot avoid, welcome” Chinese Proverb
    3. 3. Best Practices for Investment Managers <ul><li>STEWARDS </li></ul><ul><ul><li>Persons who serve as Trustees or Committee Members of Foundations & Endowments </li></ul></ul>
    4. 4. Best Practices for Investment Managers <ul><li>INVESTMENT MANAGERS </li></ul><ul><ul><li>Organizations that manage separate account, mutual funds, unit trusts & commingled funds </li></ul></ul>
    5. 5. Best Practices for Investment Managers <ul><li>INVESTMENT ADVISORS </li></ul><ul><ul><li>Persons who provide comprehensive and continuous investment advice </li></ul></ul><ul><li>Examples: </li></ul><ul><li>Financial Advisors </li></ul><ul><li>Brokers </li></ul><ul><li>Consultants </li></ul><ul><li>Trust Officers </li></ul><ul><li>Wealth Managers </li></ul>
    6. 6. Evolution Of The Concept Of Prudence <ul><li>Harvard v. Amory (1830) </li></ul><ul><ul><li>Prudent Man Rule </li></ul></ul><ul><ul><ul><li>Common Law Standard </li></ul></ul></ul><ul><li>ERISA (1974) </li></ul><ul><ul><li>Prudent Expert Rule </li></ul></ul><ul><ul><ul><li>Federal Law (Supersedes state laws) </li></ul></ul></ul><ul><li>Uniform Prudent Investor Act (1994) </li></ul><ul><ul><li>Private Trusts </li></ul></ul><ul><ul><ul><li>State Law (Civil Law) </li></ul></ul></ul><ul><li>Uniform Prudent Management of Institutional Funds Act (2006 draft) </li></ul><ul><ul><li>Charitable Trusts </li></ul></ul><ul><ul><ul><li>State Law (Civil Law) </li></ul></ul></ul>
    7. 7. Definition of Prudence <ul><li>The fundamental principle for professional money management, stated by Judge Samuel Putnum in 1830 </li></ul><ul><li>&quot;Those with responsibility to invest money for others should act with prudence, discretion, intelligence, and regard for the safety of capital as well as income.&quot; </li></ul>
    8. 8. What Is Needed To Participate? <ul><li>“It’s not whether you win or lose - it’s how you play the game.” </li></ul><ul><li>Process…Process…Process </li></ul>You can't always be right...but you can be prudent
    9. 9. Industry Best Practice <ul><li>www.cfainstitute.org </li></ul><ul><ul><li>Trade Management Guidelines </li></ul></ul><ul><ul><li>Soft Dollar Standards </li></ul></ul><ul><ul><li>Research Objectivity Standards </li></ul></ul><ul><ul><li>Global Investment Performance Standards </li></ul></ul><ul><ul><li>Asset Manager Code of Conduct </li></ul></ul><ul><li>www.nccusl.org </li></ul><ul><ul><li>UPIA (1994) </li></ul></ul><ul><ul><li>UP&IA (1997) </li></ul></ul><ul><ul><li>UPMIFA (2006) </li></ul></ul><ul><ul><li>UMPERS (1997) </li></ul></ul>
    10. 10. INDUSTRY BEST PRACTICES <ul><li>www.sia.com </li></ul><ul><ul><li>Compensation Practices </li></ul></ul><ul><ul><li>Firm Management </li></ul></ul><ul><ul><li>Internal Firm Policies </li></ul></ul><ul><ul><li>Relationships with Regulators </li></ul></ul><ul><ul><li>Role of Compliance Professionals </li></ul></ul><ul><ul><li>Investor Confirmations </li></ul></ul><ul><ul><li>Registered Rep Supervision </li></ul></ul><ul><ul><li>Investor Complaints </li></ul></ul><ul><ul><li>Soft Dollars </li></ul></ul><ul><ul><li>Sales Supervision </li></ul></ul>
    11. 11. INDUSTRY BEST PRACTICES <ul><li>Center for Fiduciary Studies </li></ul><ul><ul><li>University of Pittsburgh’s </li></ul></ul><ul><ul><ul><li>Joseph M. Katz Graduate School of Business </li></ul></ul></ul><ul><ul><ul><ul><li>Center for Executive Education </li></ul></ul></ul></ul><ul><li>Foundation for Fiduciary Studies </li></ul><ul><ul><li>7 Uniform Fiduciary Standards of Care </li></ul></ul><ul><ul><li>5-Step Investment Management Process </li></ul></ul>
    12. 12. P UBLISHED W ORKS
    13. 13. P UBLISHED W ORKS
    14. 14. Best Practices for Investment Managers (24) <ul><li>Key decision-makers demonstrate expertise in their field, and there is a clear succession plan in place. </li></ul><ul><ul><li>Qualitative Evaluation of Expertise </li></ul></ul><ul><ul><li>Formal Succession Plan </li></ul></ul><ul><ul><ul><li>Compensation Practices (SIA) </li></ul></ul></ul><ul><ul><ul><li>Firm Management (SIA) </li></ul></ul></ul>
    15. 15. Best Practices for Investment Managers (24) <ul><li>There are clear lines of authority and accountability, and the mission, operations, and resources operate in a coherent manner. </li></ul><ul><ul><li>Strategic Plan </li></ul></ul><ul><ul><li>Tactical Plan </li></ul></ul><ul><ul><li>IT Plan </li></ul></ul><ul><ul><li>Business Succession Plan </li></ul></ul><ul><ul><ul><li>Firm Management (SIA) </li></ul></ul></ul>
    16. 16. Best Practices for Investment Managers <ul><li>There are effective and appropriate external management controls. </li></ul><ul><ul><li>Audits </li></ul></ul><ul><ul><ul><li>Internal </li></ul></ul></ul><ul><ul><ul><li>External </li></ul></ul></ul><ul><ul><li>Control Self-assessments </li></ul></ul><ul><ul><li>Examinations </li></ul></ul><ul><ul><li>Compliance Program </li></ul></ul><ul><ul><li>Board & Committee Oversight </li></ul></ul>
    17. 17. Best Practices for Investment Managers <ul><li>Mutual Funds, Hedge Funds & Annuities associated with the organization have suitable board governance. </li></ul><ul><ul><li>Performance </li></ul></ul><ul><ul><li>Suitability </li></ul></ul><ul><ul><li>Expenses </li></ul></ul><ul><ul><li>Standards for Selection & Retention </li></ul></ul><ul><ul><li>Conflict & Self-Dealing Addressed </li></ul></ul>
    18. 18. Best Practices for Investment Managers <ul><li>Remuneration of the Investment Manager/s and compensation of key decision-makers are aligned with client interests. </li></ul><ul><ul><li>Performance Based </li></ul></ul><ul><ul><li>Long-term Focus </li></ul></ul><ul><ul><li>Fully-disclosed </li></ul></ul><ul><ul><li>Transactional vs. Asset-based </li></ul></ul><ul><ul><ul><li>Compensation Practices (SIA) </li></ul></ul></ul>
    19. 19. Best Practices for Investment Managers <ul><li>The working atmosphere is conducive to attract, retain, and motivate key employees. </li></ul><ul><ul><li>Turnover </li></ul></ul><ul><ul><li>Decision-making Process </li></ul></ul><ul><ul><li>Creativity </li></ul></ul><ul><ul><li>Opportunity </li></ul></ul><ul><ul><li>Formal Evaluation Process </li></ul></ul><ul><ul><ul><li>Compensation Practices (SIA) </li></ul></ul></ul><ul><ul><ul><li>Internal Firm Policies (SIA) </li></ul></ul></ul>
    20. 20. Best Practices for Investment Managers <ul><li>There is a formal structure which supports effective compliance. </li></ul><ul><ul><li>Corporate Culture/Attitude </li></ul></ul><ul><ul><li>Compliance Program </li></ul></ul><ul><ul><li>Compliance Officer </li></ul></ul><ul><ul><li>Control Self-assessments </li></ul></ul><ul><ul><ul><li>Role of Compliance Professionals (SIA) </li></ul></ul></ul>
    21. 21. Best Practices for Investment Managers <ul><li>The organization provides financial transparency that demonstrates there is capital and profitability to sustain operations and adequate disclosures are made. </li></ul><ul><ul><li>Financials </li></ul></ul><ul><ul><li>Form ADV </li></ul></ul><ul><ul><li>Fee Schedules </li></ul></ul><ul><ul><li>Agreements </li></ul></ul><ul><ul><ul><li>Disclosure Documents </li></ul></ul></ul><ul><ul><ul><li>Proxy Voting, </li></ul></ul></ul><ul><ul><ul><li>Soft-dollar (CFA & SIA), </li></ul></ul></ul><ul><ul><ul><li>Pricing, </li></ul></ul></ul><ul><ul><ul><li>Best Execution </li></ul></ul></ul><ul><ul><ul><li>Pay-to-Play </li></ul></ul></ul><ul><ul><ul><li>Client Directed Brokerage </li></ul></ul></ul>
    22. 22. Best Practices for Investment Managers <ul><li>The organization is committed to firm-wide innovation and has established a competitive position of strength. </li></ul><ul><ul><li>Creativity </li></ul></ul><ul><ul><li>Decision-making </li></ul></ul><ul><ul><li>Best Practices (CFA, SIA, etc.) </li></ul></ul><ul><ul><li>Systems </li></ul></ul><ul><ul><li>Personnel Development </li></ul></ul>
    23. 23. Best Practices for Investment Managers <ul><li>There is an effective process for allocating and managing both internal and external resources and vendors. </li></ul><ul><ul><li>Soft-dollar (CFA & SIA) </li></ul></ul><ul><ul><li>Trade Allocations (CFA) </li></ul></ul><ul><ul><li>Best Execution </li></ul></ul><ul><ul><li>Research Objectivity (CFA) </li></ul></ul>
    24. 24. Best Practices for Investment Managers <ul><li>The organization has a diverse client base, and the capacity to service the same. </li></ul><ul><li>Concentrations by: </li></ul><ul><ul><li>Fees </li></ul></ul><ul><ul><li>Investment Objective </li></ul></ul><ul><ul><li>Asset Class </li></ul></ul><ul><ul><li>Industry/Sector </li></ul></ul><ul><ul><li>Security </li></ul></ul><ul><ul><li>Type of Client </li></ul></ul><ul><ul><li>Product </li></ul></ul>
    25. 25. Best Practices for Investment Managers <ul><li>The organization is properly managing the growth/decline of assets under management. </li></ul><ul><ul><li>Growth/Decline Rates: </li></ul></ul><ul><ul><ul><li>Fees </li></ul></ul></ul><ul><ul><ul><li>Assets </li></ul></ul></ul><ul><ul><ul><li>Accounts </li></ul></ul></ul>
    26. 26. Best Practices for Investment Managers <ul><li>The investment system is clearly defined and consistently adds value. </li></ul><ul><ul><li>Investment Story </li></ul></ul><ul><ul><li>Process </li></ul></ul><ul><ul><ul><li>Policies, Procedures & Controls </li></ul></ul></ul><ul><ul><li>Exception Identification, Tracking & Resolution </li></ul></ul><ul><ul><li>Dispersion of Returns </li></ul></ul>
    27. 27. Best Practices for Investment Managers <ul><li>The investment research process is defined, focused, and documented. </li></ul><ul><ul><li>Soft-dollar Budget </li></ul></ul><ul><ul><ul><li>Benefits Derived </li></ul></ul></ul><ul><ul><li>Off-list Securities </li></ul></ul><ul><ul><li>Concentrations </li></ul></ul><ul><ul><ul><li>Research Objectivity (CFA) </li></ul></ul></ul><ul><ul><ul><li>Soft-dollar (CFA & SIA) </li></ul></ul></ul><ul><ul><ul><li>Trade Allocations (CFA) </li></ul></ul></ul><ul><ul><ul><li>Research Objectivity (CFA) </li></ul></ul></ul>
    28. 28. Best Practices for Investment Managers <ul><li>The portfolio management process for each distinct strategy is clearly defined, focused, and documented. </li></ul><ul><ul><li>Benchmarks </li></ul></ul><ul><ul><li>Asset Allocation </li></ul></ul><ul><ul><li>Deviations from Policy </li></ul></ul><ul><ul><li>Periodic Reviews </li></ul></ul><ul><ul><li>Risk & Return Differentiation </li></ul></ul><ul><ul><li>Dispersion of Returns </li></ul></ul>
    29. 29. Best Practices for Investment Managers <ul><li>The trade and execution process is defined, focused, and documented. </li></ul><ul><ul><li>Soft-dollars (CFA & SIA) </li></ul></ul><ul><ul><li>Best Execution </li></ul></ul><ul><ul><li>Trade Allocation </li></ul></ul>
    30. 30. Best Practices for Investment Managers <ul><li>The organization has responsible and ethical marketing and sales practices. </li></ul><ul><ul><li>CFA INSTITUTE Compliant (Best Practices) </li></ul></ul><ul><ul><ul><li>Performance Reporting ( GIPS ) </li></ul></ul></ul><ul><ul><ul><ul><li>Return </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Risk </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Benchmarks </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Time-frame </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Asset Classification </li></ul></ul></ul></ul><ul><ul><ul><li>Trade Management (CFA) </li></ul></ul></ul><ul><ul><ul><li>Research Objectivity (CFA) </li></ul></ul></ul><ul><ul><ul><li>Proxy Voting </li></ul></ul></ul>
    31. 31. Best Practices for Investment Managers <ul><li>There is a defined process for the attribution and reporting of costs, performance, and risk. </li></ul><ul><ul><li>Performance Measurement </li></ul></ul><ul><ul><ul><li>Risk </li></ul></ul></ul><ul><ul><ul><li>Return </li></ul></ul></ul><ul><ul><ul><li>Benchmark </li></ul></ul></ul><ul><ul><li>Performance Attribution </li></ul></ul><ul><ul><ul><li>Classifications </li></ul></ul></ul><ul><ul><ul><li>Cause & Effect </li></ul></ul></ul><ul><ul><li>Fees & Expenses Disclosed </li></ul></ul><ul><ul><ul><li>Explicit </li></ul></ul></ul><ul><ul><ul><li>Implicit </li></ul></ul></ul>
    32. 32. Best Practices for Investment Managers <ul><li>The investment system and portfolio management processes are monitored and are consistent with assigned mandates. </li></ul><ul><ul><li>Performance Dispersion </li></ul></ul><ul><ul><li>Off-list Securities </li></ul></ul><ul><ul><li>Concentrations </li></ul></ul><ul><ul><li>Exceptions to Min/Max Allocations </li></ul></ul><ul><ul><li>Socially-Conscious </li></ul></ul>
    33. 33. Best Practices for Investment Managers <ul><li>There is an effective risk-management process to evaluate both the organization’s business and investment risk. </li></ul><ul><ul><li>Control Self-assessments </li></ul></ul><ul><ul><li>Risk Management Plan </li></ul></ul><ul><ul><ul><li>Role of Compliance Professionals (SIA) </li></ul></ul></ul>
    34. 34. Best Practices for Investment Managers <ul><li>Control procedures are in place to periodically review policies for </li></ul><ul><ul><li>Best Execution, </li></ul></ul><ul><ul><li>Soft Dollars (CFA & SIA), </li></ul></ul><ul><ul><li>Pricing, and </li></ul></ul><ul><ul><li>Proxy Voting </li></ul></ul>
    35. 35. Best Practices for Investment Managers <ul><li>There is an effective process for identifying, managing, and disclosing conflicts of interest. </li></ul><ul><ul><li>Broker/Dealer </li></ul></ul><ul><ul><li>Investment Managers </li></ul></ul><ul><ul><li>Mutual Funds </li></ul></ul><ul><ul><ul><li>Insider Trading </li></ul></ul></ul><ul><ul><ul><li>Front-running </li></ul></ul></ul><ul><ul><ul><li>Pricing </li></ul></ul></ul><ul><ul><ul><li>Asset Manager Code of Conduct (CFA) </li></ul></ul></ul>
    36. 36. Best Practices for Investment Managers <ul><li>There is a process to periodically review the organization’s effectiveness in meeting its fiduciary responsibilities. </li></ul><ul><ul><li>Annual Reviews </li></ul></ul><ul><ul><li>Investment Policy Statements </li></ul></ul><ul><ul><li>Investment Objectives </li></ul></ul><ul><ul><li>Risk & Return Levels </li></ul></ul><ul><ul><li>Vendor Selection & Usage </li></ul></ul>
    37. 37. 4-Step Fiduciary Quality Management System
    38. 38. Organize (7) <ul><li>Practice M-1.1 </li></ul><ul><ul><li>Senior management demonstrates expertise in their field, and there is a clear succession plan in place. </li></ul></ul><ul><li>Practice M-1.2 </li></ul><ul><ul><li>There are clear lines of authority and accountability, and the mission, operations, and resources operate in a coherent manner. </li></ul></ul><ul><li>Practice M-1.3 </li></ul><ul><ul><li>The organization has the capacity to service its client base. </li></ul></ul><ul><li>Practice M-1.4 </li></ul><ul><ul><li>Administrative operations are structured to provide accurate and timely support services and are conducted in an independent manner. </li></ul></ul>
    39. 39. Organize (7) <ul><li>Practice M-1.5 </li></ul><ul><ul><li>Information systems and technology are sufficient to support administration, trading, and risk management needs. </li></ul></ul><ul><li>Practice M-1.6 </li></ul><ul><ul><li>The organization has developed programs to attract, retain, and motivate key employees. </li></ul></ul><ul><li>Practice M-1.7 </li></ul><ul><ul><li>There is a formal structure sup-porting effective compliance. </li></ul></ul>
    40. 40. Formalize (8) <ul><li>Practice M-2.1 </li></ul><ul><ul><li>The organization provides disclosures which demonstrate there are adequate resources to sustain operations. </li></ul></ul><ul><li>Practice M-2.2 </li></ul><ul><ul><li>The organization has a defined business strategy which supports their competitive positioning. </li></ul></ul><ul><li>Practice M-2.3 </li></ul><ul><ul><li>There is an effective process for allocating and managing both internal and external resources and vendors. </li></ul></ul><ul><li>Practice M-2.4 </li></ul><ul><ul><li>There are effective and appropriate external management controls. </li></ul></ul>
    41. 41. Formalize (8) <ul><li>Practice M-2.5 </li></ul><ul><ul><li>The organization has a defined process to control its flow of funds and asset variation. </li></ul></ul><ul><li>Practice M-2.6 </li></ul><ul><ul><li>Remuneration of the company and compensation of key decision-makers is aligned with client interests. </li></ul></ul><ul><li>Practice M-2.7 </li></ul><ul><ul><li>The organization has responsible and ethical reporting, marketing, and sales practices. </li></ul></ul><ul><li>Practice M-2.8 </li></ul><ul><ul><li>There is an effective risk-management process to evaluate both the organization’s business and investment risk. </li></ul></ul>
    42. 42. Implement (5) <ul><li>Practice M-3.1 </li></ul><ul><ul><li>The asset management team operates in a sustainable, balanced, and cohesive manner. </li></ul></ul><ul><li>Practice M-3.2 </li></ul><ul><ul><li>The investment system is defined, focused, and consistently adds value. </li></ul></ul><ul><li>Practice M-3.3 </li></ul><ul><ul><li>The investment research process is defined, focused, and documented. </li></ul></ul><ul><li>Practice M-3.4 </li></ul><ul><ul><li>The portfolio management process for each distinct strategy is clearly defined, focused, and documented. </li></ul></ul><ul><li>Practice M-3.5 </li></ul><ul><ul><li>The trade execution process is defined, focused, and documented. </li></ul></ul>
    43. 43. Monitor (4) <ul><li>Practice M-4.1 </li></ul><ul><ul><li>There is a defined process for the attribution and reporting of costs, performance, and risk. </li></ul></ul><ul><li>Practice M-4.2 </li></ul><ul><ul><li>All aspects of the investment system are monitored and are consistent with assigned mandates. </li></ul></ul><ul><li>Practice M-4.3 </li></ul><ul><ul><li>Control procedures are in place to periodically review policies for best execution, “soft dollars,” and proxy voting. </li></ul></ul><ul><li> Practice M-4.4 </li></ul><ul><ul><li>There is a process to periodically review the organization’s effectiveness in meeting its fiduciary responsibilities. </li></ul></ul>

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