A Word on Investment Committees

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A Word on Investment Committees

We were recently asked by a client to make a presentation on Investment Committee Development. In addition to our own invaluable experience with investment committees, we found several interesting research sources for our presentation. One source was a Trustee Primer produced by the CFA Institute, who to some remains the final word on best practices in investment management.  The primer starts with a quotation from the venerable investor Warren Buffett;

As the old saying goes, what wise men do in the beginning, fools do in the end.”

The saying implies that policies and strategies that have been successful for a period of time are often adopted at later stages without the insight and careful judgment of the wise man, often resulting in unfortunate outcomes. For investment committees, it strongly suggests that committee members “own” the responsibility for prudent and thoughtful oversight of investment assets. This does not mean that you need the investment expertise of a Warren Buffet, but it does mean that you should have a thoughtful process to form an investment committee, which in turn is charged with developing investment policy, which will provide the framework for a prudent investment process.

Investment committee members do not necessarily need to have investment expertise, but should have the willingness and ability to learn basic principles of investing with regard to investment policy, asset allocation, manager selection and performance review. (A good investment management consultant should be able to convey the basic and relevant principles of investing to the committee.) It is important to note that investment committees are not charged with managing the day-to-day activities of investment portfolios but should understand the framework of the investment process in order to provide oversight on policy, asset allocation, manager selection/monitoring and performance reporting. Sometimes, investment committees are blessed with an investment practitioner. Sometimes this is a mixed blessing, as practitioners have the difficult task of separating their investor instincts from their fiduciary role.  The best investment practitioner committee members we have seen do not attempt to micro-manage the portfolio but often serve as translators and important facilitators of debate between consulting professionals and non-expert committee members. It is important that all committee members feel comfortable discussing and debating all aspects of the process. In this way, committees “own” the investment process and are truly acting in a fiduciary capacity, as opposed to following what wise men did in the beginning.

Other takeaways from our presentation:

  • “We believe the process by which you arrive at decisions is, in many ways, as important as the actual decisions. In particular, you should take ownership of your oversight responsibilities. You should delegate to those who have the required expertise, experience, and authority to do their jobs. And you should hold all parties accountable for actions that they take (or fail to take). We believe this basic philosophy distinguishes strong governance structures from weak ones.” (CFA Institute)
  • “Trustee approaches can range from an unhealthy involvement in the smallest operational decisions to a similarly unproductive disengaged attitude.” (CFA Institute
  • The best investment committees employ common sense and discipline.

Behavioral Dynamics

  • Group’s size, its member’s expertise, approach to conflict resolution and member productivity all have an impact.
  • Heterogeneity is critical to group effectiveness.
  • Recognize that Investment theory is often at odds with behavioral tendencies. Committee members should maintain disciplined approach, remaining focused on objectives and Investment Policy.

(Investment Committees: Vanguard’s View of Best Practices)

 

 

 

About Jim Jeffery, CFA

Jim Jeffery, the founder and principal of Jeffery Asset Management has joined Solaris Advisors LLC as Managing Director where he will lead the non profit senior living effort. Jim is a Chartered Financial Analyst (CFA) with more than 20 years experience in the financial services industry. Have a question about your financial plan? ASK JIM

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