4 steps to our Due Diligence Process


My friend’s wife is constantly putting him on a diet. He often appeases her by ordering taco salads instead of a traditional entree.  She assumes he’s eating healthy, but little does she know: some taco salads can pack as many as 1,700 calories and over 100 grams of fat! His wife might need to do her homework.

As important as it is to the success of dieting to understand what you are eating, it is equally important to understand what you are buying when investing.  Once you have identified your appropriate mix of asset classes for your risk tolerance and time horizon (your strategic allocation), it is time to start doing your homework to identify the appropriate securities to fill each asset bucket. 

Here is a summary of the steps we follow at The Center:

  • Qualitative Review: We generate ideas through reading, conference attendance, peer networking and searches in Morningstar Direct.  The following criteria serve as a starting point.
    • At least $50 Million of Assets Under Management (AUM)
    • Manager tenure of 10 years or more
    • Bottom half of expense ratio in category
    • Manager invests in their strategy ($1 Million and up preferred)
  • Quantitative Review: We review the performance and risk characteristics of investment options within the category.  Criteria may include but are not limited to:
    • Review of rolling returns to identify performance standouts over different time periods – 1, 3, 5, and 10 years.
    • Review of performance during difficult time periods (bear markets or periods of performance difficulty for the asset category).
    • Review of rolling statistics including standard deviation, alpha, beta, Sharpe and information ratio relative to best-fit benchmarks.
    • Review of upside-downside capture.
    • Review asset flows by category and individual security.
  • Due Diligence Questionnaire & Manager Interview:  Center for Financial Planning’s Due Diligence Questionnaire is submitted to the short list candidates for completion.  Manager interviews for active strategies are conducted via phone conference or in-person interview. 
  • Mock-up in portfolios: Position is added into a mockup of the portfolio to identify if intended outcome is achieved and what degree of exposure is required to help attain the desired outcome (percent allocated within the portfolio).

You can also view a simplified graphic on this process:


You can do your investment “waistline” a favor by doing your homework. Don’t be fooled by taco salads, make sure you are getting what you want when it comes to investing by having a defined buying process, or talking to your financial planner about establishing one that is appropriate for you!

Angela Palacios, CFP®, AIF® is the Director of Investments at Center for Financial Planning, Inc.® Angela specializes in Investment and Macro economic research. She is a frequent contributor The Center blog.

Any opinions are those of Angela Palacios and not necessarily those of Raymond James.