The Request for Proposal (RFP)
Finding the right investment service provider for your organization
For nonprofit organizations that have long-term investment pools, there are few decisions more important than securing an investment service provider.
The RFP: Both document and process
An RFP is a document that facilitates the formalized bid-seeking process that a nonprofit organization conducts when searching for an investment service provider. The RFP document requests information on the candidate firms’ services, levels of expertise, performance, fees and other important factors.
For new nonprofits embarking on an initial search for an investment service provider, and established organizations whose practice it is to periodically evaluate their current provider by seeking comparative proposals, the RFP process requires a high degree of planning and coordination to help ensure that the organization obtains the services it needs to pursue its financial goals and mission.
RFP goals and objectives
The primary goal of the RFP process is to solicit complete and comparable proposals from qualified investment service providers and to evaluate those proposals in a fair and objective manner.
Why do an RFP?
Why dedicate time and effort to the RFP process? A successful RFP procedure should:
- Document a fair and thoughtful set of steps that provide an objective rationale for the selection of the investment service provider
- Exemplify the high standards that board members and donors expect for the prudent stewardship of the organization’s assets
- Serve as a guide to the organization in finding the right provider to support its goals and
- Provide a structured opportunity for reflection on the services that the organization needs and the type of relationship that will serve it best
Before you begin
Careful planning can help to ensure a higher probability of success, both in the RFP process itself and in finding a provider that fits your needs. Before issuing the RFP:
√ Set your goals: There are many ways in which your portfolio can be managed. They range from a traditional structure, in which your board or investment committee — perhaps guided by an external consultant — selects and dismisses individual managers, to a comprehensively outsourced structure where a single firm is hired by your board or committee to serve as an extension of your staff, with full discretion over portfolio implementation decisions.
Before embarking upon the RFP process, you should determine where on this spectrum your organization wants to position itself. This can be accomplished by self-assessment, external research and, if necessary, via an external consultant. The efficiency and effectiveness of your RFP process will be greatly enhanced if you’ve decided in advance on the structure you wish to employ and can use the relevant metrics of that structure to assess the merits of potential candidates. Conversely, using the RFP process as a means of making this decision can easily lead to delays, confusion and a result that’s less than optimal for your organization.
The following questions are relevant to this goal-setting process:
- How important is a broad range of investment expertise?
- What’s the importance of portfolio liquidity to our organization? Are we interested in including less-liquid investments in the portfolio, such as hedge funds, private equity, venture capital and real estate?
- How do we define risk? Is risk equivalent to volatility of returns, or are there other risks — such as the risk of capital loss, operational risk or reputational risk — that are equally worthy of consideration? When considering the provider’s capabilities, how highly do we value dedicated resources such as a robust risk modeling team that can perform stress tests and scenario analyses on the portfolio?
- If we seek a fiduciary partner who’ll exercise discretion over the portfolio, what level of financial strength will we require from that firm? Will a boutique manager or registered investment adviser (RIA) with comparatively little capital be adequate, or will we require a more substantial institution with a larger capital and resource base and stronger operational protocols?
- In addition to demanding a level of fees that’s reasonable and prudent for the strategies in which we invest, how important is the absolute level of costs that we’ll incur? When considering the potential benefits of a more highly diversified portfolio that includes alternative investments, are additional costs such as performance fees an obstacle? If low total costs are a priority, what role should indexing play in our portfolio?
- What other services beyond investment — such as education, training, service and support, and specialized reporting — will we expect from the investment service provider we select?
Set your goals
|From: Stand-alone consulting|
|To: Nondiscretionary advice and implementation|
|To: Single firm — full discretion over portfolio|
√ Assess your resources: Who’ll serve on your RFP committee? What time, experience and skill do they bring to the process? How many firms will you invite to submit proposals? The amount of information requested of each candidate firm should be limited to what your team and internal staff can reasonably handle. As a rough indicator, the number of firms invited to submit proposals multiplied by the number of questions asked will give you a general idea of the scale and scope of the task ahead.
√ Determine your needs: To the extent possible, you should undertake sufficient internal evaluation and conduct enough advance research on potential providers to ensure that you invite only firms that offer the range of services you desire. Depending on the type and size of your organization, those services could include:
- Investment and management of endowments and other institutional funds
- Administration of charitable trusts and gift annuities
- Custody services
- Long-term investment planning
- Conversion of assets
- Ability to value, manage and, if necessary, dispose of nontraditional gifts (such as real estate or mineral rights) that you may receive
- Trust services
- Administrative and record-keeping assistance with grant-making and other distributions
- Advisory support for board governance and self-evaluation
Formulating the request
The RFP should provide information about your organization that will help potential providers understand your mission, structure and long-term goals. If available, you might also include a copy of your investment policy statement (IPS), your spending policy (if not included in the IPS), the asset allocation of your current portfolio and a recent performance report.
The questionnaire you provide to candidate firms should ask for their history, the structure of their firm and details regarding their qualifications, services, investment policies, performance results and fee structure.
The RFP process
|Form a committee|
|Prepare the RFP and questionnaire|
|Create an invitee list|
|Send the RFP|
|Allow a time period for potential providers to ask clarifying questions.|
|Review responses/check for completeness|
|Evaluation 1: Grading|
|Evaluation 2: Committee discussion|
|Conduct reference checks|
|Evaluation 3: Face-to-face meetings|
|Final investment service provider selection|
Six steps to getting the process right
1. Put someone in charge
Appoint one person to oversee the development of the RFP. This individual should be knowledgeable about your organization, its mission, and the relationship between the organization and the investment assets.
The appointed individual will need to be able to devote sufficient time to the project (a rough guideline might be 20 to 30 hours). He or she should work collaboratively with a small multidisciplinary committee, including representatives from the finance, human resources, communications, donor development and other areas, as applicable, to support these efforts.
2. Be specific
One of the most important goals for the RFP document should be to express in specific terms what your organization is — and is not — looking for. If you use an existing RFP template, make the necessary changes so that the form reflects your organization’s goals and objectives; otherwise, you may receive responses that lack the information necessary to make an informed decision. It may be helpful to provide candidate firms with a sample asset allocation to ensure that you’ll be able to objectively compare returns and cost estimates. Firms should also be instructed to specify whether the returns presented include fees, are hypothetical, are based on a representative client or are composites that include multiple accounts.
3. Decide on weighting factors early
What matters more to your organization? What matters less? Are investment services more important than administrative services, or are they equally important? Does your organization place a high value on a firm’s ability to provide strategic consulting services in addition to investment management? Make your priorities clear to the candidate firms. Describe which service aspects are most important to your organization so that they may provide in-depth responses in those areas.
4. Consider a face-to-face meeting
Apart from objective factors, considerations such as “fit” — the comfort level that you have on a personal basis with your provider — can play an important role in your final decision. To determine comfort level, organizations typically require an in-person interview (often referred to as a “finals presentation”) to be delivered by the top three prospective providers.
5. Spell out schedules and expectations
Make sure to clearly state the timeline for proposal submission, evaluation, presentations and decision-making.
6. Allow sufficient time
Give the respondents at least three to four full weeks after receiving the RFP document to respond to your questions. It may also be useful to build in a period during which you’ll take questions from respondents before they submit their proposals. Finally, it’s essential that you leave sufficient time for your RFP committee to deliberate so it isn’t rushed during the important evaluation stage.
The first task in evaluation is to ascertain whether you’ve received complete proposals from all respondents. If you find that questions have been left unanswered or responses are in some other way incomplete, your committee can decide whether to contact respondents and allow them an opportunity to forward the missing information or whether to hold a hard line regarding completion deadlines.
It’s often helpful to use an evaluation structure that enables the committee to grade respondents’ answers to each question on a scale from excellent to unacceptable. By judging each respondent using the same criteria, you level the playing field. You can then combine this formal grading structure with information from the face-to-face meetings or other factors that address issues of “fit” with your organization, its mission and goals. Other factors that can be important in the evaluation process include:
- Emphasizing fairness and taking each proposal at face value
- Enabling multiple individuals to contribute to the scoring process and allowing their scores to be contrasted or aggregated (for example, averaged)
- Allowing criteria to be grouped into sections, with weightings assigned both at the section and individual response level
- Encouraging accurate comparisons of candidates against individual RFP criteria
After the individual reviewers have scored the proposals, you can initiate a meeting in which members of the RFP committee discuss their common understanding of the responses and try to iron out any wide discrepancies in scoring. At that time, you can identify any additional clarification needed from the respondents and, if desired, put a process in place to contact the respondents to receive that further information.
Making the decision
The next step in the evaluation process is narrowing down the field to several finalists — often three or so firms — with whom you’ll meet face to face.
These meetings can be the most important part of the process, since it’s here that you should expect to encounter at least some of the individuals who would be actively working with your organization and to judge their “fit” with your committee, staff and operational structure. The answers and impressions you receive in this face-to-face setting, supplemented by a final reference check, should enable you to bring your RFP process to a successful conclusion with the selection of the investment service provider that’s right for you.
Make every question count
To obtain a sample RFP questionnaire, please email email@example.com.
A private wealth advisor can help you get started.
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