It's Time For a Due Diligence Upgrade
Due Diligence 2.0 Commitment
Traditional due-diligence and risk-assessment frameworks in the asset management industry have led to a system in which white, male asset managers control 98.6% of the investment industry’s over $80 trillion in assets under management.(1)
Given society’s pressing need to reduce systemic racial inequities in education, hiring, compensation, promotion, healthcare, environmental pollution, and mass incarceration, among many others, the asset owner’s and advisor’s most impactful potential contribution is to allocate more capital to BIPOC (Black and Indigenous people of color) managers, communities, entrepreneurs, and stakeholders. Furthermore, by not actively allocating to BIPOC managers, there may be a loss of potential financial returns. (2) Fiduciaries are expected to act with prudence, which means “acting with or showing care and thought for the future” (3) and “in the best interests of their clients(4).” Creating a substantially equivalent, but alternative due-diligence process that increases the flow of capital to BIPOC managers is consistent with the fiduciary responsibility of our organizations.
BIPOC asset managers consistently state that existing financial industry due diligence standards result in institutional assets continuing to be managed by the same firms, which are overwhelmingly white.(5) While asset allocators may have initial conversations with many BIPOC managers, they are notably missing from institutional portfolios. Often BIPOC managers are eliminated from the selection pool based on historical industry standards for due diligence that reinforce existing social inequities.
To catalyze movement of capital to BIPOC managers, the undersigned asset owners, consultants, and financial intermediaries, on behalf of asset owners who value BIPOC manager inclusion, commit to making the following shifts in our due diligence processes:
Consider Track Record Alternatives
For newer strategies or products, instead of insisting on a specific minimum track record for the product, we will evaluate members of the investment and leadership team based on past experience, investment sourcing capabilities, domain expertise, as well as assess prior track records in related or relevant work, possibly including redacted representative separate account performance rather than requiring cost-prohibitive third-party assessments, as well as each individual’s role in achieving previous results. To the extent the manager is using partner firms to complement their skillsets, the relevant experience and track records of said partners will be evaluated.Expand What it Means to Work Together
Knowing that opportunities for individual investment managers to “work together” or “invest together” at existing asset management firms are few and far between for BIPOC managers, we will take into consideration the time individual investment managers have worked together while building the firm and in other organizations as substitutes to evaluate the stability of the partnership.Reassess Assets Under Management as a Risk Metric
Instead of using manager assets under management as a proxy for the financial stability of a manager, we commit to evaluating a) the manager’s history of operating effectively with lower than industry-standard budgets, b) growth momentum in assets under management (AUM), c) AUM growth in previous position(s) at prior firm(s), and d) what happens to the underlying investments in the event of firm insolvency.
Respect BIPOC Time
Reports from BIPOC managers conclude that while they have committed extensive time to due diligence conversations and formulating written responses to questions, very little capital has actually moved. Recognizing that time is the most precious commodity for BIPOC managers attempting to create financial products that address society’s most intractable challenges, we will minimize requests for meeting time with managers and, if possible, convene group meetings in which managers can answer questions for multiple asset allocators at once. In addition, to relieve the often onerous time burden associated with submitting RFIs and RFPs, we will condense, standardize, and/or support managers in completing these documents.Contextualize Fees
Rather than eliminating BIPOC managers due to higher fees, we will compare the services being provided to peer managers (e.g., Does the BIPOC manager require more staff or outsourced partnerships to collect data from impacted communities?). Additionally, because higher fees are often correlated with lower assets under management, we commit to working with BIPOC managers to allow for initial high fees predicated on a manager projection for future fee reductions tied to fundraising success.Include Historically Unrecognized Risks
To the extent we consider market inefficiencies or underpriced risks in our investment philosophy, we will endeavor to evaluate the potential risks and costs of BIPOC under-capitalization in our analysis. This could include the costs of social unrest, climate migration, sickness and productivity losses, and reduced government revenues from economic underperformance, among others.Be Willing to Go First
We will consider being an anchor/seed investor or part of a first close (or in the case of a mutual fund or exchange-traded fund, at/near fund inception) rather than insisting on being in later closes. This contributes to fundraising momentum, and we agree to not require special terms such as lower fees in order to take this position.
Offer Transparency about Remaining Hurdles
If after the aforementioned revisions to our due diligence process we still have specific minimum thresholds or deal-breakers, we will explicitly state these at the outset when circulating RFPs or RFIs to BIPOC managers. This way, if the manager finds them overly burdensome, they have the opportunity to invest their time in other capital raising opportunities.
Provide Detailed Feedback
If we choose not to invest with a BIPOC manager who has engaged in our alternative due diligence process, given our commitment to mutual learning, we will provide clear, specific, and timely feedback regarding the reasons for rejection.
It is our sincere intention that these alternative means of evaluating BIPOC managers will contribute to advancing the investment management industry’s allocation of capital towards parity with national demographic representation.
(Endnotes below)
Signatories: (scroll down to sign)
Asset Allocators & Advisors:
Abacus Wealth Partners
Nia Impact Capital
45North Partners
NorthFork Financial
Natural Investments
Cornerstone Capital Group
Momentum Advisors LLC
Green Retirement, Inc.
Enso Wealth Management
Impact Investors
Align Impact
Cogent Consulting PBC
Crewcial Partners
Wetherby Asset Management
Sonen Capital
Temescal Canyon Partners
Global Endowment Management
Marigold Capital
Health Gap Ventures
Syntrinsic Investment Counsel
Impact Engine
Reynders, McVeigh Capital Management LLC
Rally Assets
WestFuller Advisors
FIIND Impact
Arabella Advisors
Christopher Street Financial
Revalue
Good Capital Investment Group
Bay Street Capital Holdings
Corbin Capital Partners
Figure 8 Investment Strategies
Newground Social Investment
Avivar Capital LLC
Educate Global (EG)
MEDA
Veris Wealth Partners
New Summit Investments
First Affirmative Financial Network
Modern Assets
Ritholtz Wealth Management
Bivium Capital Partners, LLC
CNote
CapShift
GRID 202 Partners
North Berkeley Wealth Management
Uplifting Capital
Habash Wealth Management
Kind Wealth
Include Ventures
Sphere
Stakeholders Capital
Zenith Wealth Partners
Trillium Impact Partners
Humanize Wealth
Nubian Square Investment Advisors
San Francisco Foundation
Staro Insights
Noviscient Pte Ltd
Asset Owners:
Nathan Cummings Foundation
Tara Health Foundation
Compton Foundation
East Bay Community Foundation
AJL Foundation
Woodcock Foundation
A to Z Impact Foundation
Excelsior Impact Fund
The Grove Foundation
Seattle Foundation
Jessie Smith Noyes Foundation
World Education Services
Halloran Philanthropies
Common Future
Community Credit Lab
Halloran Philanthropies
Labiana Life Sciences
Amalgamated Charitable Foundation
Regional Foundation
SK2 Fund
Individual Investors (2)
Mary Reynolds Babcock Foundation
Tercero Solutions
Global Delta Capital
McConnell Foundation
Other:
Gratitude Railroad
Silicon Valley Social Venture Fund
Mission Driven Finance
The Sankofa Group
Toniic
Integrated Capital Investing
Francesco Collaborative
Impact Finance Center
New Power Labs
Diane Sabin
Amy Brakeman
Boston Impact Initiative
New Majority Capital
Elisaph PV Solar
Matinecock Capital LLC
New Majority Capital
ICA
Impact Charitable
Gratitude Railroad
Omarang Charity Acts and Mentorship
Sign the Commitment
The contact person’s name, email, and the firm/organization AUM will be held securely and not published. Only the aggregate AUM of all signatories will be published.
Made in Collaboration.
This commitment was co-authored by Brent Kessel, Rachel J. Robasciotti, Tracy Gray, and Erika Seth Davies, with input and contributions from over a dozen BIPOC asset managers.
Endnotes
Knight Foundation, “Knight Diversity of Asset Managers Research Series,” Knight Foundation Website (December 16, 2022).
Lyons-Padilla, Sarah, et al. “Race Influences Professional Investors’ Financial Judgments,” Proceedings of the National Academy of Sciences of the United States of America (August 27, 2019).
Oxford Dictionary, "Definition of Prudent," Oxford University Press via Lexico.com. (October 23, 2020).
“Commission Interpretation Regarding Standard of Conduct for Investment Advisers,” United States Securities and Exchange Commission (July 12, 2019)
Morris, David, “Investment management is overwhelmingly dominated by white men - and it’s costing you money,” Fortune (June 19, 2020).