Due Diligence: Critical for Investment Management (and Building Your Career, Too)
By Melissa J. Anderson (New York City)
“The difference between a million dollar account and a hundred million dollar account is a couple of zeros – and a lot of time,” said Holly Miller, Partner at Stone House Consulting, LLC. Miller has a passion for due diligence. Benchmarking and record-keeping, she says, are going to be critical for the success of investment management firms moving forward.
“Due diligence is a big, hot topic, particularly since we all found out about Bernie [Madoff].” she said. “If you look at the investment management industry, we have a poor track record for tracking metrics – metrics on trades per day, orders, how many portfolios, fail rates, etc. …The industry needs to do a better job of benchmarking. What do things cost? What does it take to support the business?”
She continued, “In the past we were able to ignore this because of the high profit margins. But those days are gone. We, as a business, need to do a better job – and benchmarking has become more critical.”
Why Due Diligence Matters Now – No Matter Your Firms’s Size
As hedge funds grow, they will encounter a more stringent regulatory environment – and Miller explained, it’s best to be prepared for in advance. “Alternative managers are going to have to get registered with the SEC – it’s a whole new world of record keeping. We all want to reach that asset level – to hit that AUM limit. It’s going to create a great deal of of infrastructure and operational management.”
“For a hedge fund manager,” she continued, “when you move from one hedge fund to two hedge funds, your work doubles, but on the expense side there’s no particular difference. It’s about time. Not all managers think of this. They think in terms of dollars managed, but not the number of accounts.”
She explained, “It’s a concept of scale. Think of flight controllers at an airport – it’s not about having one plane to land – it’s about how many plans are up in the sky, and keeping them from running into each other.”
Miller also cited the new push for transparency, not just by the government, but also by investors as a business rationale for greater operational due diligence and infrastructure. Additionally, she said, “The other thing that is happening on the regulatory front is that US managers are finding themselves in a new regulatory environment globally.”
It all adds up to striving for stronger infrastructure and better operational middle and back office due diligence now, she explained, rather than be caught off guard later. “It would be like trying to do your taxes without all of your receipts,” she said.
Strong Due Diligence Matters in Work and Life, Too
Miller started out at Mary Baldwin College, an all-women institution in Virginia. “Then I went straight from Mary Baldwin to the University of Virginia and I studied electrical engineering,” said Miller.
“It was the sixth class of women admitted and the first class that was 50/50 [male and female]. I’m not that old – I’m 51 – we’ve come such a huge, long way.”
She continued, “As an engineer, I had to think logically and solve problems – and that’s what we do for our clients.”
Miller explained, “I left school early to get married, and moved to New York. The New York Times was on strike, and without the classifieds I didn’t know where to get a job. Since I had been studying computer science, I would go into large buildings and look at the directory and hand my resume to any company that had more than two floors – thinking that if they had a lot of space they probably had computers. It didn’t work well at all.”
“Finally through a connection at an employment agency, I landed at Shaw Data, the first investment account vendor ever.” she continued. “I worked hard and got hired away by the client, and was always paid too little because I was female – which generated a fair number of job changes. Then I became a single mom.”
But, she said, “All of those little job changes contributed to my career in consulting. Learning from mistakes, seeing the way different firms work differently, learning best practices from other people and places.”
All of these lessons have impressed upon Miller the value of doing one’s workplace “due diligence.” For example, she said, “Learn what clients want – external and internal clients. Learn what the person on either side of you wants to do. Understand what you do that mucks up the works for other people – the people who get the output of what you do. Understand what the people ahead of you in the work chain are doing too – teach ahead of you.”
She explained that a thorough understanding and double-checking of the work chain will “help you be more aware of what’s happening down the line, and it makes you a more valuable employee.”
She continued, “Very few people have a full view of investment management, soup to nuts. If you want to be a leader you have to know all of the pieces. It makes you more effective – today’s managers don’t understand all of the things in the back office. They don’t know who to turn to, they get bad advice from inside the firm or they get good advice and they don’t know who to trust. And they’re often afraid of IT. It goes back to benchmarking. Somebody moving up in the business needs to learn all of the aspects.”
Additionally, she said, “Don’t pass up opportunities to live and work overseas. I got to live for two years in London, and it was also great for my kids. You develop an appreciation for how colloquial we Americans are – even though we spoke the same language, it was like we had to get used to a whole new way of talking to each other, even around the house – are you talking about the British third floor or the American third floor? When you say “dollars” or “domestic,” what do you mean?”
She explained, “The protocol and rules for engagement are massive things to think about. [By living abroad] you learn to think about the client’s interpretation and that’s huge.”
Miller’s company, Stone House Consulting, is “a small consulting firm dealing with strategy, operations and IT. We focus exclusively on investment management, particularly hedge funds.”
Recently having undertaken a strategic partnership with Investit, Ltd., a London-based firm, Miller explained, “Global clients need our services outside US. The new alliance gives us the ability to take our Cornerstone product and offer that outside the US. We are also taking on some Investit services and capabilities – research on the buyside and benchmarking products.”
Regarding both firms being women-owned companies, Miller said, “Both firms are very relationship focused and keen on helping clients, even moreso than making a buck (not to imply we don’t want to make a buck!).” She recalled, for instance, advising a client against spending money a product he didn’t need and suggesting where he really needed extra work. “A lot of consultants wouldn’t do that. But relationships are our focus. It might not be the the most financially advantageous for us in the short term, but we strive toward a client relationship that is long lasting.”
She continued, “I’d hate to insult any men – there are plenty of male firms that are very relationship focused too. In fact, the old boys club is relationship focused. It’s a network. Women may be a bit more nurturing, but there’s only so much nurturing you can do in asset management. Relationships matter!”