Due Diligence? Really?

May 4th 2018

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Molly Goetz, CFP®, CDFA®

How does an all-expense paid three day trip to the Ritz Carlton Hotel in Marina del Rey, CA (where on average it is sunny 286 days a year) sound? Or would you rather get out of the US and spend four days at the Four Seasons in Mexico City (don’t worry about the distance, you can visit the spa for a “Jet Lag” treatment)? Did I mention this would be free?  A recent Wall Street Journal article shed some light on this practice that is not well known, but increasingly common.

If I were an advisor at another firm that might be me lounging by the pool or getting a hot stone massage. If I were at another firm I might attend a “Due-Diligence” conference in some exotic location where I would be meeting with fund managers and other companies eager to explain their latest investment offering or service. So eager, in fact, that those companies would have paid for all of my expenses. In exchange, as an advisor, all I have to do is get to know the fund manager and consider their product when designing my clients’ portfolios.

Sounds pretty good right? Well to an advisor yes, but for clients, not really. These vacations conferences can cloud an advisor’s judgement and make her more inclined to make a recommendation to a client that may not be in that client’s best interest. Don’t take it from me, take it from behavioral economist George Lowenstein and Carnegie Mellon University who studies conflicts of interest. According to Lowenstein, “Humans are prone to reciprocate. When someone does something nice for you, you feel the need to do something nice in return.”

Conference attendees and sponsors point out that these events grant them exposure to numerous fund managers and serve as due diligence.  At Greenspring, we perform due diligence, but we do it differently. When we speak with fund companies we do it by phone or video conference. We look at facts and data at our desks, far from a pool or spa.  In the event we feel it is necessary to examine a company’s operations, we do it on our own dime. In our opinion, this allows us to conduct due diligence efficiently and offer our clients the most objective advice possible.

Information contained herein has been obtained from sources considered reliable, but its accuracy and completeness are not guaranteed. It is not intended as the primary basis for financial planning or investment decisions and should not be construed as advice meeting the particular investment needs of any investor. This material has been prepared for information purposes only and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Past performance is no guarantee of future results.