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Prudent Investor Update,  January 31, 2018

Key Questions to Ask Investment Reps

Once the prudent investor standard regime is in effect and eligibility requirements have been finalized, investment representatives will be quick to target municipalities as potential new clients, contacting municipal officers with their sales pitches.  

Here are some of the key questions to ask when an investment representative calls:

Assess their capabilities:  It is important to assess their financial expertise and ability to prudently manage the municipality’s money. A key advantage is if an advisor is familiar with municipal legislation and has been working in the industry for years, experiencing the ups and downs of the markets.
  1. What expertise do you have in managing funds for municipal governments? Do you have knowledge of both municipal investment regulations under the Municipal Act as well as any applicable securities regulations when dealing with municipal money?
  2. What is your educational background? Do you have professional designations? If the representative works within a team of investment professionals, what are their backgrounds (education, designations, experience, length of time employed at the firm)?
  3. How long have you been an investment advisor? How long have you been working at this firm?
  4. How many accounts do you manage? (In order to help determine if they will have the time to devote attention to your account)
  5. Has the advisor lost any large accounts over the past two years? If so, why?
  6. Which authority regulates the firm and its representatives? How long has the firm been in operation? What are the firm’s assets under administration and how does this compare to a year ago?
  7. Has the representative or firm ever been the subject of disciplinary actions? What is the process for handling client complaints?
  8. What is your compensation based on –performance, asset growth, transactions and how is compensation calculated?

Portfolio Management: In order to help you determine if the investment rep has a clear investment strategy that meets the municipality’s risk and return requirements, here are some key questions to consider asking:  
  1. Do you adhere to an investment style or discipline? What is the basis for your recommendations?
  2. How do you select investments for the portfolio? For instance, if investing in mutual funds, do you meet with the portfolio managers? If so, how often? How do they manage risk?
  3. To get a better understanding of their knowledge and ability to effectively communicate, ask the rep for his or her thoughts on the current bond and stock markets.  For example, “With bonds under pressure due to a rising interest rate environment, what actions do you suggest to mitigate this risk and increase the portfolio’s returns?”
  4. How will you diversify the municipality’s investments to reduce the portfolio’s risk?
  5. Are there minimum investment requirements? Are there holding period requirements? How quickly can  the municipality’s money be accessed, if needed?
  6. Note if the investment representative recommends all investment options or if there a bias to in-house products?
Know the costs:  Managing the costs is a key responsibility when managing money in accordance with a prudent investor standard approach. You must know and be able to justify all investment costs. This is particularly important given the low yields of fixed income securities as a small increase in fees can materially reduce a portfolio’s returns. Be sure to know all the costs associated with managing the portfolio and how are these fees calculated? What are the management fees? What are the commission fees? If recommending funds, what are the management expense ratios (MERs) of the funds? MERs are costs that the fund manager charges and can be quite high for many equity funds. Furthermore, know how these costs compare to the industry average. If any costs are higher than the industry average, you must be able to justify the added cost to the portfolio. Other questions to consider asking are:
  1. Is there a tiered cost structure?
  2. What additional services do you provide (in-house expertise) and what are the associated costs?
Communications: Ensure that the rep is able to clearly address all of your concerns and provide you with a firm understanding of the portfolio will be prudently managed. After all, you will be the person going before council to explain and justify how the municipality’s money was invested and provide details surrounding the risks and returns.
  1. What communications will the municipality receive, and how frequently?
  2. How often will you review the portfolio?
  3. How quickly will you receive a response to any questions and who would you contact?
  4. Do you provide educational information such as webinars and workshops?
Before making any investment decision, it is prudent to explore multiple options. The One Investment Program offers industry knowledge and 25 years of experience with municipal investments and regulations. One is working hard to ensure that all municipalities, regardless of whether they qualify independently, can benefit from prudent investor standards. One offers competitive low costs, and provides educational information about how to successfully incorporate investments into your municipality’s capital planning process.

The One Investment Program’s core objective is to serve our members and help them meet their objectives. As a not-for-profit organization, all profits are reinvested into providing services that support our members.