In my capacity as the Chief Investment Officer at Dynasty Financial Partners, which serves a network of more than 45 independent RIAs, I actively participate on both the Investment Committee of Dynasty and as an outside member on the Investment Committees of more than 15 of our network firms.
Why are ICs important?
Externally, ICs illustrate professionalism and institutional-quality
portfolio management to both clients and prospects. Internally, the discipline, consistency, and "institutional memory" ingrained in a formal IC is helpful in responding to regulatory audits.
Given the importance of ICs, here is a summary of what I have learned about IC "best practices."
1. Make the IC part of the fabric of your firm. ICs are not ad hoc or sporadic — they define your firm's investment approach and, therefore, your firm's investment value proposition.
2. Develop an IC policy manual or charter that states the purpose of the committee, a broad summary of how you plan to manage client portfolios, how often the committee will meet, what decisions the committee will make, and a process for periodically reviewing past decisions. The manual won't only create an organizational "memory" but also a road map for the continuous running of the committee after the initial excitement settles into a routine, or if there is a change in personnel.
3. Less is more. When the regulators come to call, they are less concerned with how you manage client portfolios (since there is no single correct way), but rather with whether or not you are managing the portfolios in alignment with how you state you will in your IC charter. So keep the charter language broad and brief – accurately convey how you plan to manage client portfolios, but give yourself flexibility in terms of implementation and customization to specific client objectives.
4. Discipline. Appoint an IC Chair and Secretary, always have a formal agenda, and keep accurate IC meeting minutes. Illustrate that this is a real committee that is making real decisions.
5. The analysis comes before the IC meeting, not during. The job of the IC is to vote on specific motions put before it. Any and all analysis or support for a given motion should be done beforehand and disseminated to the IC members with enough time to review prior to the IC meeting — not at the meeting itself.
6. All decisions are consensual. ICs will occasionally say "no", but more often than not the decision is either "yes" or "we need more information before deciding." If there is a dissenting vote or minority, the answer is "no" until or unless more information or analysis is provided. The chair of the IC often has "veto rights," but those rights should be used very sparingly.
7. Continuity. It is important to schedule your investment committees with a periodic regularity (monthly or quarterly is recommended) and put all dates on your annual calendar at the beginning of the year. Stick to your schedule.
8. Don't personalize the IC charter. Firms frequently list specific individuals when drafting the IC Charter. But doing so means updating the charter anytime there is a staff change. Make the charter as generic as possible so that is remains an "evergreen" document that is accurate regardless of who is sitting on the IC at any given time.
9. Include outside members. Many of the best investment committees are comprised of select members from the firm as well as invited outside members. This helps add cognitive diversity and avoid the "groupthink" that can occur when all IC members work at the firm. In addition, consider adding outside members who are well-known or respected within your target market or geography (e.g., a local university professor or market professional), have documentable experience and expertise in investing and managing portfolios, or are centers of influence within your target market. This helps project a more professionalized approach to your
portfolio management activities.
10. List your committee members prominently on your website. By doing so, you are saying '"we are a professional firm that takes clients' entrusted investments very seriously."
Done properly, investment committees provide continuity ("institutional memory"), consistency, and discipline to the management of your client portfolios. They also assist in regulatory review and audits, illustrating professionalism and appropriate record keeping. They can be an important source of credibility with clients and prospects, and can help advisers deliver a differentiated client experience.
Scott Welch is the Chief Investment Officer of Dynasty Financial Partners.
