Institutional grade operational due diligence requires more than just ticking the boxes on a checklist. An operational due diligence framework needs to cover six key areas:

The process followed within this framework should involve a number of steps from agreeing on exact review requirements with the client through to receiving and reviewing requested information from the investment manager, conducting on-site due diligence meetings and preparing a final report including recommendations for improvement. An important part of the process is providing feedback to the investment manager on areas of concern and agreeing with her/him a plan and timeframe for addressing these issues.

An investment with any investment manager exposes an investor to both investment and operational risk. No level of research can eliminate either of these risks completely. However, thorough due diligence can improve understanding of the risk and control environment of the manager and provide the trustees with additional comfort that risks have been adequately assessed. There is no shortage of advice available to investors on which asset class or investment manager to invest with.

Quality advice on the operational risks investment managers are taking is less plentiful but investors and trustees should be aware of the potential consequences of not giving it the level of attention it requires and deserves.

Philip Hope is director and chief executive officer, and Luke MacRedmond is a senior executive at Morse Consulting.