Finding the Right Investment Manager During and Post COVID-19 Pandemic
By Katherine Zheng, CPA and Steven L. Berse, CPA
Individuals, family groups and organizations with substantial assets and net worth often employ the services of professional investment management firms for guidance in achieving their financial goals. The COVID-19 pandemic has led to an incredibly turbulent time for these investors. With the growth in the types and number of financial entities, the globalization of the investment process and the increase in competition among Investment Management (IM) firms, finding a suitable firm can be very challenging for investors. Below are a few key characteristics to look for in IM firms when choosing your investment manager.
Cybersecurity is critical to an organization, especially since the start of the COVID-19 pandemic. IM firms with effective and strong cybersecurity programs demonstrate business value and strong fiduciary responsibility. The COVID-19 pandemic has forced companies toward rapid digitization. There has been a drastic increase in the use of automation and cloud capabilities, among other technology options, and a continuation of remote work for many employees during and post COVID-19. These changes in daily operations may not disappear after the pandemic as life returns to normal. Cyber hackers and scammers are trying to take advantage of the tremendous technology usage during this time. Given the difficult economic conditions arising from the COVID-19 pandemic, many companies facing budget constraints are cutting expenses across the board.
Investors should seek investment managers with increased levels of resources allocated to cybersecurity programs and board involvement to keep pace with rapid information technology transformation and to protect data against increasing levels of cyberthreats and attacks. IM firms should support activities for business continuity planning and disaster recovery that are beyond cyber resilience. They should also select third parties including asset custodians and recordkeepers who retain the responsibility for the services they provide and for the confidentiality and secure protocols for protecting sensitive data.
Investors can review the asset custodian’s and recordkeeper’s SOC 2 reports to help gain transparency of the specific controls that are implemented by each organization. The SOC 2 report addresses a service organization’s controls that relate to operations and compliance, as outlined by the AICPA’s Trust Services criteria in relation to availability, security, processing integrity, confidentiality and privacy. A SOC 2 report also includes a detailed description of the service auditor’s test of controls and results.[i] The report holds service organizations to a diligent standard in terms of security controls.
Enhanced Digital Market Capabilities
IM firms with enhanced digital market capabilities can have a slight timing advantage on certain information which can increase management’s risk awareness and further improve the strategic trading selection process and help build an effective investment model. IM firms need to keep up in fast-moving markets, especially during a period of crisis. Managers should invest in both traditional data software and alternative data sources. Alternative data is information that originated from unofficial or noncompany sources that can help managers incorporate insights [ii] and metrics into company performance more quickly and accurately than traditional data sources. Active managers with enhanced digital market capabilities are acting quickly to address issues during a time of crisis. They can also identify opportunities in volatile markets. Even managers with long-term strategies can benefit from utilizing real-time information.
Meeting Regulators With Confidence
Regulatory authorities are imposing increasingly demanding requirements on financial service firms because of numerous incidents in the last decade of corporate fraud, market downturns and disastrous operational risk failures that had rippling effects across the globe. IM firms are beset by innumerable difficulties, especially in a constantly shifting regulatory environment during uncertain times.
IM firms that embrace a proactive approach to regulatory readiness in their operational culture are operating their business effectively and have a strong competitive advantage. IM firms with a sustainable and efficient regulatory compliance and exam management process are empowered organizations that can demonstrate consistent compliance as well as preserve their integrity and brand value. Regulatory agents usually begin their regulatory exam by scrutinizing the “tone at the top” and culture of an organization, because the root problem of many financial failures often results from a poor organizational culture.[iii] It is critical to understand that gathering sufficient resources, dedicating time to develop organizations in a structured manner, identifying issues in compliance and risk management processes, and designing a robust action plan are all gradual processes.
Compliance With Global Investment Performance Standards (GIPS)
IM firms should be in compliance with the GIPS standards. The GIPS standards are a set of global standardized methods and principles for fair calculation and presentation of investment performance that are established and governed by the CFA Institute.[iv] Compliance with GIPS, although voluntary, grants a passport to IM firms for credibility of their investment results. The GIPS standards are designed to give investors the transparency they need to compare and evaluate investment managers.
IM firms should engage a qualified third party to independently verify their fund performance and adherence to the GIPS standards. Verification accesses whether (1) the firm has compiled with all the composite construction requirements of the GIPS standards on a firm-wide basis and (2) the firm’s policies and procedures are designed to measure and present performance in compliance with the GIPS standards.[v] IM firms in compliance with GIPS demonstrate their commitment to their fiduciary responsibility. These firms usually have robust investment performance policies and procedures and strong internal controls and governance processes. Investors are then able to readily compare investment performance among firms. Investors can have a greater degree of confidence if the performance information presented to them is complete and fairly presented. Investors should review and compare IM firms’ GIPS Composite Disclosure Presentations.
The current pandemic, along with major political, economic and social events, has resulted in increased market volatility. It can be easy to lose confidence as an investor during uncertain times. Investment managers who possess the above characteristics can help increase confidence for investors and ultimately help lead investors on a path to a successful investing future.
[i] Bernard Gallagher, SOC 1 and SOC 2 Reports – Do you Know the Difference? https://www.ispartnersllc.com/blog/soc-1-soc-2-reports-difference/
[ii] The Wall Street Journal, What is Alternative Data? https://www.wsj.com/articles/what-is-alternative-data-11575860400
[iii] U.S. Securities and Exchange Commission, 2020 Examination Priorities, https://www.sec.gov/about/offices/ocie/national-examination-program-priorities-2020.pdf