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How to create an investment committee for your firm

    How to create an investment committee for your firm

    Whatever the size of an adviser practice, an investment committee is key to ensuring that client investment outcomes can be met.

    It also provides the practice with a framework to evidence the processes that went into making recommendations and maintaining the suitability of those recommendations.

    It’s all about governance

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    Fundamentally, an investment committee’s responsibility is to provide a frame of reference for suitable investments and their consequent oversight – in other words, governance.

    What we mean by governance here is the setting of an investment policy, objectives and, importantly, limits; then reviewing performance and compliance. Creating a set of clear and measurable accountabilities (or key performance indicators) to judge progress over time should also be part of the remit, as well as recommending and approving changes to policy.

    It is then up to the practice’s chief investment officer/head of investments to execute the investment policy as mandated by the committee and the rest of the investment team to carry it out.

    Issues an investment committee should consider

    The committee needs to have an investment policy statement in place which includes the:

    • Philosophy – which could cover the underlying portfolio theory, belief (or not) in the equity risk premium, whether behavioural finance has a place and the top-down/bottom-up proportion in the investment process.

    • Investment method – whether the investment committee believes in active investing, passive only or whether it thinks there is a place for both.

    • Investment style – this could be a range of things, such as value versus growth, or risk targeted versus return focused.

    • Types of investment tools to use – generally, these could be collectives, direct investments, segregated accounts, undertakings for collective investment in transferable securities (Ucits) and alternative investment fund managers (AIFMs), which essentially are hedge funds and private equity funds.

    • Permitted investments – firstly, whether certain ‘alternative’ asset classes should be used. Hedge funds, for example, might provide diversification; however, they were often found to be illiquid during the times of market stress like we had recently. Secondly, whether certain ‘sin’ investments should be excluded; this could mean excluding the shares of alcohol and gambling companies.

    • Compensation scheme – the investment committee needs to decide whether there should be a compensation scheme for the investments or not (if this is found to be very important then exchange-traded funds (ETFs) would be excluded).

    • Panel approach – here a decision needs to be made on whether an individual adviser approach or a centralised investment proposition work best.

    • Special cases – it needs to be considered what the investment committee wants to do with clients who do not fit into this framework.

    The asset allocation policy should include the:

    • Strategic asset allocation (SAA).

    • Tactical asset allocation (TAA).

    • Opportunistic or dynamic asset allocation.

    The investment selection policy should cover:

    • A white/grey/black list.

    • Promotion relegation.

    • Fund/discretionary fund manager (DFM) interviews and meetings.