A request for proposal (RFP) can serve as an effective tool for both new and established nonprofit organizations seeking an investment manager or other financial services provider. Whether conducting an initial search or reevaluating an incumbent provider, nonprofits can use the RFP process to procure the investment services most encompassing of its goals. This requires both a firm understanding of the organization’s mission and an established framework to objectively evaluate and identify the most suitable proposals in pursuit of selecting the best service provider. This article will provide guidance on each step of the RFP process and discuss the key considerations to ensure its success.
Before the RFP
Before beginning the search for an investment manager, your organization should understand the various models for nonprofit investment management. The three most common types of providers are investment consultant, outsourced chief investment officer (“OCIO”) and dedicated internal investment office.
Investment Consultants inform and advise their clients. Typically, they provide detailed reporting and analysis for the investment portfolio, but the investment committee is ultimately responsible for investment decisions.
OCIOs report to the investment committee, but they accept full fiduciary responsibility to invest on a discretionary basis. The investment committee and the OCIO mutually agree to investment guidelines upfront. Then the OCIO is tasked with identifying, investing in and monitoring best-in-class investment strategies. They generally provide access to an experienced investment team, fee-advantaged investment strategies, detailed reporting, portfolio analysis and sophisticated risk management tools.
Dedicated Internal Investment Office
A dedicated internal investment office has only one client. The investment office, typically composed of a chief investment officer (CIO), a team of research analysts and a reporting team, accepts full responsibility for the investment portfolio. Additional operational support such as custody services may need to be outsourced. This model is most typical among the largest endowments and foundations due to intense competition and generally higher costs associated with elite investing talent.
Three Keys for RFP Success
1. Trust the Process
While a well-designed RFP can bring order and efficiency to the investment manager hiring process, a poorly-designed one can have the opposite effect. Given the amount of time and energy that organizations commit to running an RFP, effective planning is critical to its success. In advance of launching a search, your organization should agree upon the following process-related decisions:
A reasonable timeline will depend on several factors that are unique to your organization. At a minimum, the process should involve: defining your organization’s objectives, crafting an RFP questionnaire, curating a list of qualified firms, sending the RFP questionnaire, reviewing responses, inviting a short list of respondents to present in-person and selecting your investment partner. While this process can appear overwhelming at first, it is helpful to begin by considering when you would like to potentially engage a new service provider, and then work backwards to set the timing for your RFP process. Plan to allocate at least one month for each of the noted steps to ensure a thoughtful and thorough process. Your organization may not require the full month to complete each step, but this timeline allows for greater flexibility and increases the likelihood of making a final decision on time without overlooking any details. Generally, the greater the number of process participants – both respondents and internal committee members/stakeholders – the longer the process is likely to complete.
General Guidance: Successful RFP timelines strike a balance between allotting enough time to critically consider proposals, while maintaining timing discipline to retain internal committee engagement. Plan for at least six to eight months to complete the full process.
b. Decision Makers
Key participants from within your organization should be chosen prior to beginning your RFP process. Consider whether the board of trustees will play a role in the process, or just the investment committee. Perhaps your organization would prefer to establish a dedicated search committee consisting of members of your broader board, investment committee, and management/staff. The composition of the group tasked with this decision will vary from organization to organization, but it is critical that roles and responsibilities are clearly defined upfront.
General Guidance: Plan to include the investment committee. Additions might include members of the board, the CFO, and/or an OCIO search consultant.
A strong RFP process should involve inviting enough respondents to ensure a variety of viewpoints across the collected proposals while limiting the list to avoid redundancy and philosophical misalignment. If your organization has never conducted an RFP process, or if the purpose of the RFP is to reassess the philosophy that is most appropriate for your organization, the list of invitees may be longer. However, keep in mind that your organization will need to dedicate time to review every written response to your RFP, and then to interview a subset of candidates.
General Guidance: Plan to invite at least three firms.
2. Critical Questions
Like any other process, the quality of the outputs (responses) is determined by the quality of the inputs (questions). It is critical that the RFP questionnaire is designed to elicit responses that will allow your organization to make an informed decision aligned with its defined objectives. While each organization has unique needs and, thus, unique questions that they should incorporate into their RFP, we have found that successful RFPs incorporate questions focused on the following five topics:
a. Firm Experience and Qualifications
This section of your RFP will ensure your respondents address the qualities that are most important to you. Key considerations should include:
i) Firm History
ii) Ownership Structure
iii) Compensation Policy
iv) Financial Condition
v) Conflicts of Interest
vi) Employee Turnover
vii) Client Retention
b. Professional Experience and Qualifications
An RFP is an opportunity for you to meet the team that will be servicing your organization, in addition to the institution. To that end, consider including questions regarding the individuals who will service your organization’s assets, including:
i) Years of Experience
ii) Number of Client Relationships They Manage
iii) Tenure at the Firm
c. Investment Philosophy
Philosophical alignment is critical in this process. Asking respondents to define their respective investment philosophies provides an opportunity for your organization to understand how they manage assets and to assess whether a given philosophy is a good fit for your organization’s unique needs. For example, at BBH, the core tenets of our investment philosophy are 1) investing with a margin of safety and a capital preservation focus, 2) performing bottom-up fundamental research on all investments and 3) investing in quality-biased concentrated strategies with high active share. Assuming a diverse invitee list, the responses will likely include a variety of investment philosophies. There is no right or wrong answer, but the respondents should be able to clearly articulate their view.
i) Does the firm have a single investment philosophy, or does it subscribe to a number of different strategies?
ii) Does the firm have a clear view on active versus passive management?
iii) Are assets internally-managed, or does the firm utilize third-party managers?
iv) How does the firm evaluate and conduct ongoing reviews of external managers?
v) What is the firm’s asset allocation philosophy and process?
vi) What is the firm’s view on alternative assets?
vii) What is the firm’s rebalancing process?
d. Performance and Reporting
While past performance does not guarantee future results, performance questions can inform your organization as to whether the respondents have the necessary talent to execute well on their stated investment philosophy. The respondents should be able to convey a successful track record driven by a transparent and repeatable process and demonstrate the talent and resources in place to sustain success net of fees. Some key performance-related topics to address in this section of your RFP include:
i) Performance History – include set periods of time, ideally ranging from one year to a full market cycle, so that you can easily compare respondents’ performance. Is the firm able to protect capital in down markets, or did they mirror the index? Is the firm able to generate consistent outperformance over a relevant benchmark over a full market cycle? Is performance presented gross or net of fees?
ii) Sample Client Report – request a sample client report that your organization can review to gauge the typical performance communication that can be expected while working with the respondent. Your fiduciary responsibility to your organization requires your understanding of investment performance, so sample reporting should be clear and easy to understand.
iii) Ongoing Portfolio Reviews – consider asking about ongoing portfolio reviews and anticipated portfolio reporting. It is important that your organization’s expected frequency of meetings and reporting is aligned with what the respondent can provide.
iv) Fees – Respondents should be able to clearly articulate their respective fee structures. What is the firm’s business model? Are they compensated based on product sales or assets under management? Typically, an OCIO fee structure will be composed of an OCIO fee (manager selection), management fees (security selection), and custody/administrative fees (operations). Be sure to request the “all-in” fee broken out by category and be sure to request any “break points” that might apply. Fees are often intentionally opaque but asking specific questions can provide clarity and allow for fair comparisons across all responses.
e. Risk Management
Protecting the corpus of your organization should always be a priority. To this end, it is of paramount importance that your organization has a clear understanding of each respondent’s ability to identify, monitor and manage your organization’s risks. The following questions focus on key elements of risk management:
i) How does the firm define risk?
ii) Describe the firm’s overall approach to risk management.
iii) Does the firm have a dedicated risk team?
iv) How does the firm identify and monitor risk exposures?
v) Describe the firm’s risk management resources (e.g. portfolio modeling, stress testing, etc.).
vi) Describe the integration of risk management and investment processes at the firm.
f. Additional Considerations
Your organization is unique, and the goal of your RFP process is to find an investment provider who meets your unique needs. To that end, the questions you include should reflect your organization’s culture and priorities. With this in mind, some additional questions you should consider include:
i) Do the senior principals within the respondent organization invest alongside clients in the same investment vehicles? The answer to this question will help you determine if the firm’s interests align with yours.
ii) Does the respondent offer Socially Responsible Investing (SRI) or Environmental, Social, and Governance (ESG) investment solutions?
iii) Does the respondent offer education programs (investment, governance, etc.)?
iv) Does the respondent have a corporate social responsibility policy?
v) Does the respondent offer other unique capabilities or services for their endowment and foundation clients beyond investment advisory services?
3. In-Person Presentations and the Decision
a. Interview Your Top Candidates (ideally five or fewer)
While a written response to an RFP can provide copious information, there is no substitute for an in-person interview. Getting to know the team that will be servicing your organization’s relationship and having the opportunity to ask them questions in an un-rehearsed setting will be critical to making the right choice. Be prepared to ask about the company’s culture and the dynamic of the relationship team (e.g. who is the primary point of contact, who typically attends meetings, how does the team communicate, etc.). The right firm must be a cultural fit for your organization.
b. The Decision
At this point, your organization has put a significant amount of effort into this process. You built the best internal team to shepherd your organization through this change. You designed a series of questions to ensure that your organization can make an informed choice. You sent your questions to a select group of investment firms that are qualified to invest on behalf of your organization. Your review committee has completed a thorough review and analysis of respondent proposals. You selected and met with the relationship teams of a subset of respondents. The last step remaining is selecting a firm that is best aligned to partner with your organization in pursuit of long-term goals and objectives. In our experience, the most common practice is to take a vote immediately following the in-person presentations. However, your firm organization should take as much time as needed to make an informed decision.
We trust the foregoing provides a useful framework for your organization should you decide to proceed with an RFP process. Recognizing that each process must be uniquely tailored towards its organizations’ defined goals, this framework is intended to bring structure to the procurement process and better equip the key decision-makers involved. Ultimately, the RFP process should be both an informative and rewarding exercise for you and your organization.