At Schultz Financial Group (SFG), we view wealth differently through our Four Capital approach. Our team works with you to build your wealth across Four Capitals – Financial Matters, Physical Well-being, Intellectual Engagement, and Psychological Space. This post focuses on what due diligence is, how SFG engages in this process, and why it’s important.
What is due diligence?
Due diligence is the investigation of an underlying investment opportunity. It seeks to provide answers to the question “What are the potential risks of this investment?” so an investor can make a well-informed decision prior to investing capital in the opportunity.
What is SFG’s process?
Our process can be broken down into three main parts:
- Investment Due Diligence focuses on understanding the ins and outs of the investment strategy, the investment manager, and the terms to which an investor would be agreeing to, among others. We conduct a quantitative analysis to determine the feasibility of the investment strategy, the risk vs. return profile, the portfolio’s volatility, market sector outlook, and the manager’s track record of achieving an investment’s target return through various market cycles, to name a few.
- Operational Due Diligence focuses on the risks associated with the execution of organizational functions. It analyzes the structure of both the investment manager and investment fund entities. Specifically, we conduct a qualitative analysis to assess the risks associated with the investment manager’s policies and procedures (e.g., cash management policy, valuation policy, business continuity plan…etc.) and insurance policies (e.g., E&O, D&O, Cybersecurity…etc.), key person background checks, investment manager style drift, litigation involving the investment or investment manager, third-party providers and counterparties, trade reconciliations and financial statements, in-person or video conference meetings with investment managers, and the investment’s terms and documentation, among others. We also conduct on-site visits, when possible.
- Once invested, it is important to conduct Ongoing Due Diligence. While Investment Due Diligence and Operational Due Diligence take into account information available prior to investing, Ongoing Due Diligence takes into account information received after an investment has been made. This allows us to potentially identify new risks that may arise or any changes to risks identified after conducting Investment Due Diligence and Operational Due Diligence.
Why is due diligence important?
Due diligence helps us identify risks associated with an investment prior to our clients allocating capital. This is especially important in the context of alternative investments (e.g., private real estate, private debt/credit, private natural resources, private equity, and hedge funds), because, once invested, an investor’s capital may be illiquid for a period of five to seven years, sometimes longer. Once the risks associated with a particular investment opportunity are identified, we can determine a client’s suitability for the investment opportunity based on their risk tolerance and portfolio objectives and constraints. Then, we provide the client with information they need to make a well-informed decision.
At SFG, we understand the risks facing today’s investors and take our role as a fiduciary very seriously. We believe transparency is the key to building trust between us and the client.
Tony Miller is an Associate Wealth Manager with Schultz Financial Group Inc.
Schultz Financial Group Inc. (SFG) is a wealth management firm located in Reno, NV. Our approach to wealth management is different from many other wealth managers, financial advisors, and financial planners. Our team of fee-only fiduciaries strives to help our clients build their wealth across four capitals: Financial Matters, Physical Well-being, Psychological Space, and Intellectual Engagement. We provide family office and wealth management services to clients located in Nevada, California, and other states. If you’d like more information, please check out our website or reach out to us via our contact page.