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7 best practices of effective investment committees
While the standards for financial professionals continue to rise, investment committees have become increasingly important as teams look for scalable ways that embrace structure and accountability to inform sound decision-making. In addition to helping satisfy regulatory requirements, an investment committee can also provide an added level of credibility to your clients and prospects. Earning and maintaining trust is one of the most crucial aspects of the client relationship. An investment committee can serve as a powerful tool to building credibility and trust through communicating the value of a disciplined approach to investing.
While there is no one-size-fits-all structure, there are several best practices that can help ensure a successful committee approach:
1. Utilize a committee charter
- A strong investment committee begins with a statement about the governance and operational framework. The issues and policies should be addressed in writing either in a board charter for the committee or in a single governing policies document.
2. Ensure an investment policy is in place with clearly stated goals
- Most established businesses operate with a written business plan. Likewise, investment committees should prepare an investment policy statement (IPS) and revisit that IPS periodically to evaluate whether it remains fully relevant to the operation.
The IPS should be a set of guidelines rather than a detailed rule book. It should define risk tolerance and return expectations, spell out any key investment policies and constraints, provide an asset allocation framework, outline any environmental, social and governance considerations, and describe generally how performance will be evaluated. The IPS can list the basic responsibilities of the committee, the board, and investment advisors. However, it should allow sufficient flexibility to address changing circumstances.
Consider a brief IPS containing only essential provisions. This will be helpful in that a shorter statement keeps the committee members focused. They are more aware of all provisions in the statement if it is shorter. Additionally, not having a policy with respect to a particular matter may pose a risk, but having a policy and not following it may be even riskier.
3. Make committee members aware of their responsibilities
- It is incumbent on committee members to ensure the success of the committee and overall process. To that end, there are certain non-negotiable responsibilities by which members should be prepared to abide. Committee members should make every attempt to attend all meetings. In order to fully participate, a member must hear the information first-hand and have the opportunity to query and interact with outside sources and other committee members. A committee member must be prepared to be an active participant in meetings. A member should understand that their personal views and investing style, while important, should be subordinate to the objectives and best interests of the committee.
4. Build a committee of proper size
- Committee size can have significant impact on efficiency. Larger committees may increase collective memory and offer broader and more diverse knowledge; however, more members can mean the decision process bogs down leading to suboptimal results. Smaller organizations with fewer available members and simpler portfolios can err on the low end. Organizations with complex portfolios with large impacts on the underlying entity and a ready member population to choose from may prefer to have more. If complexities or issues arise, rather than expanding the committee, consider assigning a subgroup to the subject, such as alternative asset class or comparisons.
5. Consider the impact of diverse thought
- When a committee is built, it is not always with an eye toward what each individual’s expertise contributes to the whole. Given that the committee membership is limited, what each member brings should be considered holistically. Consider mapping out a matrix covering the key skills that you think are essential to the committee. Your skills matrix may show an abundance of skill in equities but a corresponding gap in alternatives or income generation. Such a template will provided transparent indicators to where you might want to engage additional knowledge or expertise. Finally, the matrix can assist with adjusting the committee membership as turnover opportunities arise.
Additionally, there are benefits to blending investment and non-investment professionals on the committee. We tend to see the more successful ones usually consist of members with diverse experiences and perspectives. Whatever the composition, continuity in committee membership is ideal. Frequent turnover erodes the overall knowledge of the investment program and often a group's cohesiveness and productivity. It’s not news to suggest that diverse perspectives lead to more robust and comprehensive decision-making; it is far less common, however, for committee leadership to consistently and effectively draw out, actively listen, and truly embrace participation and inclusion across all members.
6. Distribute a thoughtful meeting agenda in advance
- Whether an investment committee has three or a dozen members, it should have a calendar of meetings scheduled for each year. We suggest a meeting once per quarter, but some committees simply cannot meet four times a year. Instead, they communicate and make decisions in other ways.
A common problem with committee meetings is that the agenda is too ambitious. The agenda should be sent out at least 48 hours in advance of the meeting and limited to a few key items. There can be limited discussion about broad economic and market trends, but the bulk of the investment discussion should relate to the portfolio and decisions that need to be reached on asset allocation and manager selection. Continued dialogue and exchange of ideas can, and should, take place outside of scheduled meetings. There should be an official Secretary for the meeting taking the minutes. This person will note when the Chair moves a topic or question to the "parking lot" to be addressed outside of the investment committee meeting. Decisions made, action items, and parking lot issues should be summarized at the end of the meeting.
Most meetings will cover the following four topics as the standard part of the agenda:
1) Investment performance assessment – targets and benchmark establishment as well as performance attribution against the targets and benchmarks.
2) Macroeconomic assessment and related tactical asset allocation moves.
3) Monitoring compliance with the investment policy focused on investment philosophy, risk level, liquidity, asset allocation, currency exposure, and manager sizing and concentration.
4) Pressure testing internal team’s (and/or external advisor’s) processes (e.g., risk management, manager due diligence, tactical asset allocation).
7. Proactively address efficiency obstacles in planning
- Group decision-making has been closely examined by academia. Several tendencies can lead to less than optimal results. It is beyond the scope of this article to cover all the difficulties that group decision-makers face but below are some of the most common.
Overcoming efficiency obstacles
||Conforming to a group thought process in order to minimize conflict and/or avoid critical evaluation.||Recruit a diverse committee.
Ensure time for independent evaluation prior to meetings.
||Filtering new information or evidence in a way that confirms preexisting opinions and beliefs.||Encourage questioning and exploring thoughts and beliefs without judgment.
Provide access to an unbiased third party view.
||Overestimating our talents and abilities.||Play devil’s advocate and respectfully challenge one another.
Consider the risks before making a decision.
||Rationalizing a course of action is the right one because everybody else is doing it.||Take time in making decisions.
Make a conscious effort to form a unique validated opinion.
|Action Bias||Favoring action over inaction, often to our benefit.||Evaluate the pros and cons of each possible response outcome.
Give equal consideration to both action and inaction.
A thoughtful approach to an investment committee can help ensure a successful effort. For more business building ideas, contact your Nuveen advisor consultant or explore additional advisor education content.