Taking the pain out of due diligence on manager selection for family offices

Few tasks in asset management are as mind-numbing as those which involve carrying out due diligence on the managers you retain – or those you want to hire.

Fortunately, help is at hand for family offices wary of the task – and it won’t cost them a cent.

You can compare the process to buying a used car. If you are less than confident you know what is happening under the bonnet there is an asymmetry of information between buyer and seller

Rob Sanders, co-founder of Door Ventures, knows the score. When he worked for Deutsche Asset Management in 2000, he filled in forms answering client requests for proposals (RFPs) which led to him cutting, pasting and adjusting of text on a heroic scale.

He says: “Data requests get duplicated over and over again by different clients. We have found that 90% of questions end up being asked by different people.”

Managers swamped by requests can be a month late in submitting replies to clients, one by one. Clients were faced with the task of ploughing through Word documents, powerpoint presentations, PDFs and spreadsheets to ferret out the data they needed.

The process produced nagging worries among clients that they had missed something out.  When filling out a stack of questionnaires, managers can sometimes fail to fill in forms correctly.

You can compare the process to buying a used car. If you are less than confident you know what is happening under the bonnet there is an asymmetry of information between buyer and seller. The uncertainty means buyers can easily back out of a perfectly good deal and vice versa.

In 2017, Sanders set out to streamline manager due diligence through fintech by co-founding Door Ventures with Roland Meerdter, a former Deutsche Bank managing director. They started off dealing with traditional managers, and have just extended the service to 40 Act Funds in the US, which include alternative investments.

Exchange-traded funds are another new area, where Door can provide access to data including tracking errors and stock lending. The sector would greatly benefit from greater disclosure, given its speed of travel.

According to Better Finance, for example, there are wide variations in stock lending profits remitted to ETFs.  One manager gives back 95%. Another only remits 49%.

Rob Hall, previously at Russell Investments, leads manager research relations. Around 200 institutional clients use Door, including family offices. Eighty managers supply data to its platform, and many more are queuing up. Sanders has plans to extend the service to private equity. He doesn’t rule out entering new sectors, over time: “Standardisation is a really valuable tool.”

To an extent, competition comes from quant tools, plus consultants, such as Mercer and Willis Towers Watson. But Sanders reckons zero fees, and Door’s qualitative approach works in its favour, and possibly lead to outsourcing opportunities.

Door uses its digital platform to list data relating to changes in products, managers and their employers. Lists would include information on manager departures, risk exposures and portfolio profiles.

It lays out descriptions, and changes, relating to manager approaches in a range of areas such as cyber-security sustainability and big data. Each product set can demand responses in 300 different areas. Clients can also use Door to acquire information which can be used to put together data on managers prior to tender processes, pulling together updates and descriptions to create profiles.  

As well as receiving responses from standard questions, Door asks managers specific questions, where clients request it. Cyber-security is a top concern among family offices, who do not need to pay for the service. Family office clients are based in Europe, South America and South Africa. Cost breakdowns and risk exposures are regularly requested.

Managers also expect to save money as a result of not needing to employ so many people to wade through data requests. Sanders points out that this can free up time to see clients interested in teasing out further responses, and complex themes.

At the end of the day, you still need human analysis,” he says. “What we offer is a way to make the process as effective as possible. Everyone is free to reach their own views.”