Future proofing your investment committee - What can we learn from the institutional and pension world?

Financial Advisory

21 April 2016

Financial Advisory

Facilitated and written by: Roderic Rennison – Rennison Consulting Expert: Jamie Farquhar – Square Mile Investment Research Sponsor introducing: Dave Robson – Carmignac

Overview

An investment committee is now a pre-requisite for intermediaries who advise and manage/oversee client investments, and the growth in both outsourcing and insourcing has resulted in a need for sound governance and robust processes which are both effectively monitored and regularly reviewed.

Purpose

The purpose of an investment committee is to oversee the investment strategy from a number of perspectives and to ensure that the best interests of both the business and its clients are at the core of all investment activity. This might range from the selection of suitable attitude to risk and stochastic modelling tools to strategic and tactical asset allocation and fund selection. For many intermediaries, the de-risking and operational efficiency of their Centralised Investment Proposition has brought a new angle in the regular oversight of third party or sub-advised services.

The challenge

How can you ensure that your firm’s investment committee is operating effectively? What lessons can be learnt from previous experience, what represents best practice and how can you ensure that you are serving the best interests of your clients?

 There are three main areas to consider:

  1.  Role
  2. Structure
  3. Process

 Each should be defined in the ‘Terms of Reference’; this is an important document that needs careful drafting at the outset of setting up an investment committee and should then be reviewed periodically to ensure that the Terms remain relevant.

 In essence a firm needs to demonstrate that it is operating in the best interests of its clients whilst at the same time acting in the best interests of the business.

A further challenge is whether there should be an Investment Committee and a separate Investment Oversight Committee. It may be appropriate on some occasions to have two separate committees. If there are too many responsibilities in just one committee, the focus/benefit may be reduced or lost.

  1.  The purpose/role

 The principal elements are as follows:

  •  To define and oversee group investment strategy
    •   To select and monitor external suppliers in respect of the following areas, amongst others:
      •  Risk tools - Attitude To Risk Tests/Stochastic modelling
      • Research – providers and tools
      • CIP constituents – Fund of Funds and DFMs
      • Platforms
    • Product selection
      • To define asset allocation – both strategic and tactical
      • To select funds
      • To define and monitor portfolio construction
      • To set and monitor mandates for sub-advisory and/or internal portfolios
      • To oversee portfolio construction
      • To monitor performance
      • To ensure longevity and continuity of proposition
  •  To define and maintain the best interests of the clients
    • To ensure the best possible client outcomes
    • To ensure and evidence suitability
    • To monitor charges
    • To monitor performance
    • To review alternatives for clients where it is appropriate to go “off panel”
    • To manage risk
    • To ‘treat customers fairly’
  •  To monitor and mitigate group risk
    • Regulatory risk
    • Brand risk
    • Conflicts of interest
    • Errors
  • A “tick box” approach is no longer sufficient; there needs to be documented selection and review processes in place that will withstand external scrutiny.

 Structure

 Aspects to consider include:

 Membership

  • Chairman – who should be Chairman? – Internal or external?
  • Senior Executive
  • Adviser/Practitioner
  • Subject Matter Expert (Internal)
  • Subject Matter Expert (External)
  • Compliance representative
  • Secretary

Questions to consider

  • Should the chair should be an investment specialist?
  • Quorum?
  • Voting structure?
  • Qualifications of members?
  • Relevant experience?
  • Rotation of individuals (keeping it fresh)
  • To whom does the committee report? (empowerment)
  •  What is the committee empowered to approve?
  • What is its relationship to other committees?
    • The Board
    • Risk and compliance function
    • Operations
    • Marketing

Process

The main aspects to consider are:

  •  Diarised regular meetings – typically quarterly
  • Review of previous minutes and actions
  • Allocated responsibilities
  • Organised agenda – define the criteria in the terms of reference – inputs and outputs
  • Prior distribution of papers – for some items the meeting is verification rather than discussion
  • Diary of activity throughout the year
  • Documented process for dealing with exceptions – for example large deals
  • Periodic compliance audits
  • Minutes and filing
  • Consider publishing internally
  • Consider publishing (excerpts) to clients……..!
  • Regular reporting
  • Risk and control
  • Breach log – asset allocation, fund limits
  • Large deals
  • Operational process – separate committee that reports to the Investment Committee?

 Finally…

 Think about the level of resource needed. All too often insufficient thought is given to who will actually do the work in between committee meetings. Unless this forms part of individuals’ roles, the required work may not get done and this will impact on the workings of the Committee.


Owen James Group

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