Registered Investment Advisors are changing the "lone wolf" approach that is common in the profession to one where a team makes investment decisions. Investment committees have become increasingly important as firms look for ways to make wise investment decisions and satisfy SEC regulators who want to know how they operate.
It is vital that RIAs participate in forming the committee, or at least have influence over how it grows and gets organized. The investment committee should enhance your practice, not hamper it. Think about what would benefit you most, and inform the committee of your needs. The expertise and oversight could take your career to a new level.
Here are some of the advantages RIAs will find to using investment committees:
RIAs gain authority in their profession as they increase accountability in the decision-making process. Even an investment committee with two or three members can add accountability. Decisions tend to get reviewed more thoroughly by committees than they would be by an advisor working alone. Larger committees of ten or more members can add even more accountability by checking each other's research and considering a greater number of diverse opinions.
The RIA may have a role that allows for overriding an investment committee's determination, or the RIA may be constrained to follow the consensus. Either way, it is a thoughtful process. If the committee is made up of reputable, responsible people, your decision-making methods could improve dramatically.
The status of the committee members can also affect accountability. For example, if a senior analyst consistently dominates a team made up of subordinates, there may not be enough push-back in discussions to support a robust analysis. It's crucial for each member to feel free to raise objections or offer insights.
"Diversity" means much more than different ethnic backgrounds and genders when it comes to investment committees. It means making sure that committee members hold a mix of varied viewpoints based on a rich variety of professional vision, life experiences and education.
An RIA can have a unique yet limited perspective, and when working single-handedly, an investment decision can "feel right" simply because it fits certain biases and assumptions. By opening the investment management process up to a diverse group, predispositions get challenged, and decisions get vetted.
It's important for the RIA to work with a group that has been consciously chosen because of its diversity. It can be difficult to create a situation where there is sure to be disagreement, but it's needed for investment committees to work effectively. Even a great RIA needs to be challenged and questioned.
A committee can't gather every time an RIA has decisions to make. A regular meeting schedule helps keep the RIA informed and armed with research, insight and detail provided by the committee. There's no standard for the frequency of investment committee meetings, so the schedule should be tailored to the firm.
A robust schedule would be twice a week. Some firms find it useful to meet on Monday to digest the weekend's financial news, and then to meet again later in the week to look at investments and review the performance of portfolios.
Some firms meet quarterly. This leaves the RIA room to explore, make decisions and evaluate investment options, but provides some committee guidance. This approach gives investments time to develop, and the committee will have a longer view of how they are doing. The RIA can then evaluate individual portfolios in light of the committee's findings. And the schedule can flex to monthly frequency, for instance, if markets become particularly volatile or trends are reversing.
RIAs may find it useful to hold meetings every six months, so the committee can look specifically at client portfolios, rather than just at the investment vehicles themselves. Such portfolio review can reveal weaknesses the RIA may be overlooking, and can provide standards for rebalancing. Also, it can be useful to invite clients to a portfolio review to demonstrate the care the firm is taking and provide transparency in the decision-making process.
Improved Decision-Making Process
One of the most important aspects of investment committees is how decisions are made. Is the RIA required to follow the consensus? Are minority opinions honored? What authority does the committee have?
If everyone has the opportunity to give input, and if that input is equally valued, the committee's consensus is inclusive, and each member will feel that individual points of view have been considered. This phase of the decision-making process must frankly allow for arguing. Allow the meetings to become heated and encourage members to stand their ground. The RIA will emerge from the meeting with a much better understanding if the reasoning behind viewpoints has been passionately explained.
The firm must decide how much leeway each RIA has in making decisions that run counter to the committee's consensus. A consensus is not always superior to individual insight. If the RIA wants to stick to a point of view the committee disagrees with, the consequences of being wrong should be clear. If the RIA feels that job security goes with agreeing with the committee, then no disagreement has weight. The committee will dictate decisions and the RIA will be in the position of merely filling orders rather than managing investments.
There is a possibility that a consensus will not be reached. The RIA can then use the discussion to inform decisions, but will have to make a decision alone. Some firms set up their committees not as decision-making bodies, but as research and analysis teams that provide information rather than decisions. The RIA is then free to use the information but is not bound to a dictate.
Avoiding Paralysis by Analysis
If the committee continually bogs down in details, no decisions will be made at all. Even the RIA will leave meetings confused about what to do.
It's fine to take a long time to reach a decision because many people are giving input; it is another matter to never reach a decision because the analysis does not produce consensus. It's important for the RIA to remain patient and let the process play out at its own speed. Someone in the meeting must have the authority to table a decision or request further input from other members of the firm.
If decisions are consistently impossible to make, the committee may have to be disbanded or reconfigured. The group dynamic must be consciously disrupted. This can be achieved by creating subcommittees or by placing term limits on committee membership.
At some point, the committee's decisions are either right or wrong. The investment choices must pay off. The RIA must be able to point to superior performance.
Many firms don't measure this at all. It goes by a feeling, an instinct that says the committee is making wise decisions. The alternative is to conscientiously track investments that were given the green light and track the ones that were rejected. This can be a tedious process, and should be assigned to a committee member.
Between the "gut feeling" and tracking approaches, the firm and the RIA can choose to evaluate success by comparing year-over-year performances on portfolios, or by comparing portfolio performance to a market benchmark, such as in index.
If the RIA feels that the committee is working blindly, with no sense of how well it is doing, it is time to suggest some kind of measurement. In the final analysis, it is the RIA's responsibility to the client that must be honored. The RIA should not get sucked into pleasing the committee at the expense of clients.
So, what should an RIA do to take advantage of the trend toward investment committees? Here are some suggestions:
- Embrace the idea of investment committees: RIAs can be caught in the position of being accustomed to great autonomy in managing investments but having to accept group decision-making. The trend is not likely to reverse, so the best approach is to make committee meetings a useful part of your practice.
- Inform your clients about how decisions are being made: Clients may be comforted to know that your entire firm is overseeing investment management. Use the existence of your investment committee as a selling point and a way to boost client confidence. You gain credibility.
- Make the investment process repeatable: The committee should have structure in evaluating and recommending investments. There should be a research component, presentations to the committee, a debate period and a final determination. If the committee makes decisions differently each time it meets, the firm will find itself wandering aimlessly. As an RIA, get involved in creating a rigorous investment recommendation process.
- Choose how formal the committee will be: Decide whether the committee should be an informal gathering or a formal entity with a board of directors, a charter, bylaws, and meeting minutes. The approach to organizing the committee can affect the nature of its deliberations. A formal group will lean toward making final decision, whereas an informal group will tend to take on an advisory role.
- Get involved in forming the committee: Either start the committee or participate in managing it. This will give you the chance to create a robust entity that can help you rather than hinder you. The trend toward using investment committees is here to stay, so your best option is to have as much influence as possible in the creating of such a committee.
- Find people who truly enjoy investment analysis: Not everyone likes to take investments apart and put them back together again. Avoid putting people on the committee who would rather not be there. Understanding investments provides a lot of pleasure to some people, so find those people and put them on your team. If the committee is already formed, ask to have individuals added who would bring enthusiasm to the table.
- Get as many different backgrounds as possible: The road to investment management is not a straight-line. Look for people who have been in different types of jobs, have an education that is unusual, or that offer a perspective that is vastly different than our own. Consider choosing people you routinely disagree with.
- Consider individual styles of decision-making and analysis: Some people are emotional; some are analytical. Others are optimists or pessimists or strategists. To the extent that you have influence over the committee makeup, seek personalities that will provide the broadest range possible. Don't look for people who will get along. The committee must be willing to accept disagreement and even passionate argument.
- Establish rules for reaching conclusions: Guidelines for achieving consensus can go a long way toward preventing roadblocks. Present some options to the committee. Will a majority vote decide issues? Does the committee merely advise or does it make final determinations? Raise these questions with the committee.
- Create a process for championing a minority position: You will inevitably come across situations where you simply think the committee is wrong, or that you have a perspective that is simply more insightful than the committee has. Create a process to voice that opinion and see if you can retain the authority to act in a way that is counter to the committee's recommendations. Make this a safe process that does not put your career at risk.
The Bottom Line
Investment committees can improve the practice of an RIA. The accountability and oversight help with dealing with the SEC, and clients can rest assured that recommendations come from a thoughtful process where all the implications for an investment are considered. Your personal style may have to adjust. Quick decisions will not be the order of the day, and gut instinct is less likely to be acceptable than rigorous consideration. You may find yourself looking at different approaches than you have in the past. In the long run, however, a well-run committee can make you a better and more successful advisor.
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