December 26, 2012
In the past decade, a new phenomenon has swept the RIA landscape. Without fanfare, acting independently, thousands of independent advisory firms have created investment committees to oversee their asset management processes. The trend seems to have begun after the so-called Tech Wreck that burst the dot-com bubble in 2000, and it accelerated as advisors sought to improve their investment processes following the market meltdown of 2008.
To date, however, very little has been written about investment committees. How are they organized? How do they work? Why would advisors even think of mimicking the investment practices of stodgy competitors like trust companies, endowments and foundations? "I sat on investment committees for four different trust institutions,” said Dan Danford, of the Family Investment Center in St. Joseph, MO. "I do think that the system provides some helpful checks and balances, but decisions by committee are often dysfunctional and usually dismiss outlier ideas."
To learn more about investment committees in the advisor community, I sent a survey out to the readers of my Inside Information service. The picture that emerged from more than 150 responses was confusing at best. It appears that the investment committee has become a Swiss Army knife in the RIA world, with different advisory firms using it for very different purposes.
In this first part of a two-part report, I’ll identify ten core purposes that investment committees serve in different types of firms, ranking them in order of the number of responses I received. If your investment committee is serving all ten purposes, based on the survey, you’re among a select minority – which means that many advisors may find new ways to use this versatile new tool in their RIA practices.
#1: As an administrative convenience for growing practices
As advisory firms grow and add advisors, it becomes increasingly difficult to standardize their investment recommendations across the firm. It gets harder and harder to avoid the compliance problems associated with giving different advice to two clients with similar profiles. One advisor may tell a client one thing about the investment markets, and another may give a contradictory view at a subsequent meeting.
Several respondents said that a centralized decision-making body makes it easier to get everybody on the same page. "The primary purpose of our investment committee is to keep the investment process systematized across all professionals, so that each client gets the same standard of care no matter which professional is their primary advisor," said Rick Adkins, of The Arkansas Financial Group in Little Rock, Ark.
David Morganstern, in Portland, Ore., talks about using the monthly discussion to harmonize disparate viewpoints. "Much of the benefit [of an investment committee] is to calibrate among partners as to our philosophy and investing practices," he said. "We are working on establishing a consistent ‘client experience,’ so we're investing essentially the same way for all of our clients – not developing one-off portfolios."
And, of course, some advisors subscribe to the simple idea that many heads are better than one when it comes to making increasingly complex investment calls. "Our Investment Committee provides a forum for investment ideas, strategies, and products to be discussed critically and chosen carefully before they are used in client portfolios," said Peter Eickelberg, of Keats, Connelly & Associates in Phoenix, Ariz.
#2: To gather a broader perspective on investment decisions
In the second half of this report still to come, I’ll look at how investment committees bring in outside data to inform their discussions. But a number of advisors said that they improve investment decisions simply by opening up their discussions to include the very different perspectives of various members of their staff. In most of the responses, that meant that, in addition to dedicated investment professionals, the committee would include the firm’s non-owner advisors, who are expected to raise issues that clients themselves might ask about.
But some firms have taken the idea of inclusiveness further than simply inviting client-facing advisors. "We make sure that all constituencies – research, financial planning, compliance, trading, the voice of the client – are represented when we make decisions to alter target allocations or make investment recommendations in general," said Greg Friedman, of Private Ocean in San Rafael, Calif.
Friedman was one of many who talked about the way different professionals can inform the investment decisions. "In a vacuum, you may decide that some new investment will reduce expected risk for the same return," Friedman added. "But if you take a broader picture, that may not work as well as you hoped." While the investment people are looking at returns, the tax specialist will be mulling tax consequences and whether the idea is suitable among taxable investments or only appropriate for tax-free accounts. The advisors are speaking on behalf of client issues – is the proposed investment so complex that clients won't understand it?
Friedman's investment committee also includes the back-office staffer who handles trading, which he said has brought a lot of value to the process. "When we come up with something," he said, "he might say, ‘Do you know what it's going to take for us to implement that?’ There are things you don't realize until you get the operational perspective."
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