RIAs seeing the upside of formal investment committees

Official bylaws and meeting minutes are becoming the norm for large and small firms

Mar 30, 2017 @ 2:40 pm

By Jeff Benjamin

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When it comes to managing client assets, some financial advisers are embracing increased levels of structure and accountability in the form of chartered investment committees that operate almost like corporate boards at public companies and foundations.

"If you're going to get to that next level, there's no way to do that without a real formalized investment committee," said David Romhilt, chief investment officer at Summit Trail Advisors.

"The main objective is to make sure there is some accountability and oversight of the investment process by someone other than just the investment people," he added. "The investment committee brings a new perspective, and it's also a reality check for us."

Mr. Romhilt's $3.5 billion advisory firm was launched less than two years ago when a team spun out from the private bank at Barclays Americas Wealth & Investment Management, where internal investment committees where the norm.

While formal investment committees are not yet a regulatory requirement, regulatory oversight is among the reasons some registered investment advisers are embracing the committee format.

"When clients ask about how you run portfolios, you want an institutional answer, and from a regulatory standpoint, when the SEC comes around they will be asking how you are making your investment decisions," said Scott Welch, chief investment officer at Dynasty Financial Partners, which helps breakaway wirehouse brokers establish themselves as independent financial advisers.

Dynasty has a network of 42 advisory firms on its platform, which combine to manage more than $20 billion in investor assets.

Mr. Welch, who is an outside board member on five different RIA-firm investment committees, encourages firms to embrace the full gamut of a board of directors, including official charters, bylaws, keeping meeting minutes, transparency and the inclusion of outside board members.

"Outside members is important but not required," he said. "An outside board member could be a local college's finance professor, or it could be a financial professional, or it could even be an influential client."

Mr. Welch said the investment committee often appeals to former wirehouse reps because it gives them a support network and formal structure that replaces what they might have relied upon in the wirehouses.

"When you work at one of the big wirehouses or banks, you might be running your own portfolios but those portfolios will be limited by what the firm allows you to do, and you might have somebody overseeing what you do," he said. "But once you go independent it is just you."

Miguel Sosa, founding partner at Premia Global Advisors, knows well the reality of transitioning from a wirehouse.

Having spent 33 years at Merrill Lynch before launching Premia in January 2016, he said, "As an independent, I have ability to do and review whatever I want and that requires even more of the investment committee."

Mr. Sosa, who oversees $180 million in client assets, meets monthly with his five-member investment committee that includes one outside member.

"The value for me is that it helps us make sure everyone is in sync, and the input I get sometimes takes me in a direction that I wasn't even considering," he said. "I think even if you only have a two-person firm you should have an investment committee."

Thomas Greco, a director at $450 million advisory firm Concentus Wealth Advisors, said less formal investment team meetings at his firm where "institutionalized" last year.

"Prior to us forming an investment committee we'd meet every week, including every adviser in the firm, but we didn't necessarily have a repeatable investment process," he said. "But last year we started to go out and recruit external board members. We created an investment policy, an operating manual, we take meeting minutes."

While investment committees can be structured to fit any firm, most committees are meeting monthly or quarterly, are made up of volunteer members, and follow set agendas and guidelines.

Also, outsourcing the investment management functions does not necessarily mean you don't need an investment committee.

"Whether you're outsourcing or insourcing your investment management, you will still need to demonstrate some oversight for the investment process," said David Canter, head of the RIA segment at Fidelity Custody & Clearing Solutions.

"The oversight angle is a huge thing," he added. "The firms that have these investment committees have them to get oversight over their investment process."

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