Making the grade: how to answer: 'is my money manager doing a good job?'.

• Author: Yager, Josh
• Position: Advising clients

Nearly every practicing CPA has been asked by a client, "Is my money manager doing a good job?" Your client recognizes that their money manager is disqualified from providing an unbiased response to this question. Clients also distrust the "free analysis" offered by other money managers who are competing for their business. And so you, the CPA, are your client's only adviser who they can trust because you are truly objective.

This question is more complex than it might seem. Implicit are other questions:

* Is the return that was produced consistent with my objectives?

* Was the performance consistent with the manager's peer group?

* Is the portfolio reasonably allocated?

* Are the fees being paid fair?

These are the types of questions that deserve a thoughtful investigation. And if you do not do it, who will?

The data collection needed to answer these questions does not require the CPA to have a securities license or a depth of familiarity with investment practices. Instead, what is needed is skill and experience to administer a process-based inquiry for which a CPA is trained.

The data required for this inquiry is fairly easy to access if one knows where to look or how to ask for it. For the most part, investment managers have access to sophisticated performance and reporting software that can be relied upon. Unfortunately, few money managers voluntarily present this data to their clients, and few clients have the industry acumen to request it. The CPA, as an unbiased adviser, is well positioned to administer this data gathering exercise.

The Baseline

The investigation must begin by documenting the performance your client has experienced during their tenure with the manager in question. In addition to collecting your client's actual return experience, you will need to collect the monthly return series and an investment policy statement -if one has been developed. Sample text for this inquiry: "Please forward to me the returns for the portfolio, both annualized since inception and as a monthly return series for this period, along with a copy of your Investment Policy Statement and asset allocation targets. "

Targeted Rate of Return

Once the client's return experience has been collected, the CPA will help the client define the targeted rate of return needed to support the financial objective for the capital being invested. This is financial planning at its most fundamental. You can arrive at this targeted rate of return by using the time...