A Business Manager's Duty to Monitor the Risk and Return of their Clients' Investment Portfolios

The Problem: You are a business manager and it is either explicitly or implicitly the case that you are responsible for monitoring the activities of the investment managers that have been entrusted with your clients’ capital. (If you are not a business manager or disagree with this statement, stop reading. This paper does not apply to you.) The problem is that most business managers do not have the internal systems, licensure, training, staff support, or time to conduct the independent monitoring functions that their clients expect of them and the law requires.

The Duty

The Bogert treatise states that a fiduciary “…cannot assume that if investments are legal and proper for retention at the beginning of the [relationship], or when purchased, they will remain so indefinitely. Rather, the [fiduciary] must systematically consider all the investments of the [portfolio] at regular intervals to ensure that they are appropriate” (A. Hess, G. Bogert, & G. Bogert, Law of Trusts and Trustees §684, pp.145–146 (3d ed. 2009)). If a business manager is a fiduciary acting on behalf of their client, part of that responsibility includes an ongoing investment review process that monitors the risk and return that was produced by the client’s investment manager. A prudent business manager will not “set it and forget it.”

The Target Return

The investment manager’s actual performance will initially be compared to a targeted rate of return that the manager was hired to produce. This begs the question whether the business manager and their client have taken steps to define a targeted rate of return for the portfolio. If they have not, they are encouraged to do so. The Target Return can be expressed as an an absolute number (e.g., 6.0%) or as a real, inflation-adjusted number (e.g., Inflation + 3.0%).

The Benchmarks

No single benchmark can precisely measure the acumen or shortcomings of the investment manager. The most prudent approach is to compare the risk and return of the actual portfolio against several key performance indicators to judge whether the client’s investment objectives are being accomplished. It is rare that a benchmarking study would ever conclusively prove that the manager was either exceptional or incompetent. More often, such a study would conclude that the manager’s performance was or was not within a reasonable range of return and risk outcomes. Common benchmarks that are used in a benchmarking study are: 1) the benchmark suggested by the investment manager; 2) a Strategic benchmark which only includes the major asset classes; 3) a Tactical benchmark that is designed to exactly match the sub-asset class allocation of the actual portfolio; and 4) a Peer Group benchmark.

The Quantitative Risks

In addition to measuring the manager’s performance against several benchmarks, there must be an evaluation of the risk that has been accepted by each manager. Some forms of risk can be discovered through statistical analysis. Often used statistical risk measures include Standard Deviation, Value-at-Risk, Beta, Sharpe Ratio, M-Squared, et cetera. This type of analysis for a marketable portfolio can be easily done by the software the current investment manager has access to. (If they cannot do this analysis it should put doubt in their ability to balance risk and return since they are not able to monitor the risk of the portfolio.)

The Qualitative Risks

Other types of risk that cannot be deduced from statistical inquiry and require a more subjective analysis.

  • Lack of Liquidity: The % of the portfolio that cannot be liquidated within 5 business days.
  • Concentration: The % of the portfolio held in the single largest security.
  • Leverage: The % of leverage used within the portfolio as reflected in a debt-to-equity ratio.
  • Lack of Valuation: The % of the portfolio assets that do not have daily valuation.

The Admonition

Get help. Most investment managers, if provided with this overview, can help the business manager create a record that these factors have been considered and documented. If the investment manager is unable to help develop such a record, a prudent business manager will take steps to independently evaluate these factors or find an investment manager that is willing and able to do so.


Josh Yager, Esq., CFP®, ChFC®


Anodos helps individual trustees save time, reduce their personal risk, and fulfill their fiduciary duties. We do this by helping trustees develop and maintain a series of governance documents which demonstrates they have fulfilled each of their duties of care. We also will act as an expert witness to defend our clients’ findings in court. What makes us unique is that trustee governance support is all we do. We do not manage money, sell insurance, or accept referral fees. We don't have a horse in the race.

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We help trustees save time, reduce risk, and fulfill their fiduciary duties. What makes us unique is that trustee governance support is all we do.