Investments  

How to run an in-house investment committee

  • Describe the importance of having an investment committee
  • Explain how an investment committee should run
  • Describe the consequences of having an investment committee
CPD
Approx.30min
  • Investment managers (those responsible for managing client portfolios)
  • Investment advisers
  • Chairperson
  • Those with significant influence functions/compliance oversight (that is, SMF16)
  • Any individuals responsible for investment research
  • The firm may also wish to incorporate an independent third party on the committee to help scrutinise the firm’s investment activities from a different perspective.

It’s also very important that an IC has very clearly defined operational conditions, and a good investment committee will have the following attributes:

  • An explicit understanding of a portfolio’s purpose and objective – client outcomes should be the driver for decision-making and portfolios should be designed with the target audience in mind
  • A clear definition of what success looks like for the portfolio
  • A clearly defined investment strategy house view based on reasonable assumptions around expected returns and exposures to risk
  • A straightforward and clearly defined process for selecting investments for addition or removal from the portfolio
  • A CIP is designed to be a standardised approach, there should be a structured and repeatable process for selecting underlying investments to demonstrate a consistent approach to decision making
  • A culture and structure where diversity of experience and opinion is encouraged
  • A commitment to follow the processes set. A committee’s terms of reference and investment policy statement are only part of the suitable systems and controls if the committee operates within the boundaries it has set itself. 

To ensure there is no confusion about the responsibilities of the IC, it should be given clear terms of reference which define its purpose, scope, structure and required outputs. Most importantly of all, an IC should consistently demonstrate the ways in which its focus will always be on producing good customer outcomes.

How should the IC act?

Each member of the committee will abide by the general ‘principles for approved persons’ and ensure in their role they are: 

  • Prepared to challenge 
  • Open-minded
  • Open to compromise
  • Carefully considering investment time horizons
  • Prepared to carry out relevant levels of research
  • Acting in the best interests of the firm’s clients.

One of the key elements of the IC is to have a robust open approach to challenge the assumptions made by it, in order to arrive at the firm’s investment proposition.

This is a safeguarding principle designed to protect both the firm and its clients. In essence, it establishes how a firm decides when it is wrong.

The safeguarding principle is based on objectivity. One potential danger to the firm and its investment proposition is ‘confirmatory bias’. Confirmation bias is the tendency to search for, interpret, favour, and recall information in a way that confirms or strengthens one's prior personal beliefs or hypotheses. 

Objectivity can be achieved by having an objective analytical tool or using an independent third party to attend the IC meetings or a combination of both. 

How the IC works 

There are a number of simple steps that can be taken in order to help the IC be effective. Organisation is key and our views on this are as follows:

  • The committee should meet monthly, or additionally under exceptional circumstances. The dates of these meetings should be arranged in advance for the year ahead
  • Minutes should be taken at each meeting, together with any presentation material supporting the decisions made. These should all be maintained in a permanent file.  This file will also act as centralised research to support client (file) recommendations, where appropriate. The minutes should be circulated to all committee members at the earliest time possible following the meeting
  • Presentation materials should be sent to committee members ahead of the meeting, so they may be reviewed in preparation for discussion at the meeting. The committee will review each of the areas listed below for ongoing appropriateness, and should include:
    • recent performance vs benchmarks
    • current asset allocation vs policy asset allocation
    • a portfolio liquidity schedule
    • material actions implemented since the last quarterly Client report
    • investment manager’s value assessment 
    • any potential issues or actions for future meetings.

In summary, the IC will become more important as the FCA looks to implement both its SM&CR initiative and look at the question of Suitability.

To ensure the Suitability criteria is met, a key part of the IC’s role should be to ensure audit trails are established to ensure clients are allocated to investments which suit their tolerance for loss. This should be a relatively straightforward process with back office systems such as Intelligent Office. 

The IC will also help demonstrate the firm is adhering to the SM&CR because each individual within the firm should have separate tasks in producing the report for the IC meeting. It will help create a culture of ownership and responsibility and it is also useful for creating a system of checks and balances within the firm. 

Finally, here is a checklist to see how your IC compares:

  • Does it help audit the firm’s investment policy?
  • Does it ensure the current investment portfolios correspond with the objectives and limits set for the firm’s investment policy?
  • Does the IC set and review Key Performance Indicators for all underlying investments to ensure they are all monitored correctly? 
  • How often does your IC meet?
  • What is its composition?
  • Does it have a 3rd party independent analysis capability and if so what form does this take?
  • Does the firm’s back office system provide the IC with the information it needs?
  • Does your IC operate on an “open-mindedness” principle?
  • Is your IC a force for good within your firm?

Elaine Parkes is head of proposition development at Signature, part of The SimplyBiz Group 

CPD
Approx.30min

Please answer the six multiple choice questions below in order to bank your CPD. Multiple attempts are available until all questions are correctly answered.

  1. An investment committee is suitable for those using pre-defined investment propositions, true or false?

  2. Why is having an investment committee more important now?

  3. How does an effective investment committee fit in with SM&CR?

  4. Which of the following is NOT a consequence of a properly established investment committee?

  5. Which of the following is NOT an attribute of a good investment committee?

  6. One of the key elements of the investment committee is to have a robust approach to challenge its assumptions, true or false?

Nearly There…

You have successfully answered all the questions correctly, well done!

You should now know…

  • Describe the importance of having an investment committee
  • Explain how an investment committee should run
  • Describe the consequences of having an investment committee

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