Many smaller firms are mistaken in thinking they do not need an investment committee. Here are the key considerations in establishing one…
Investment committees are usually associated with larger advice firms and those conducting discretionary management, but the reality is the same rules and principles apply to smaller firms. Indeed, given the number of firms now operating pre-defined investment propositions or fund panels, this topic has become increasingly relevant to firms of all shapes and sizes.
From a regulatory perspective, the FCA expects firms to have effective control mechanisms in place that identify and reduce risks to clients. Firms also need to be able to show how they are proactively monitoring and managing risks, and whether this is leading to suitable outcomes.
Investment committees are therefore an important control for any firm operating a centralised investment proposition and ensuring the house view is promoted.
Role of the investment committee
An investment committee’s fundamental responsibility is to provide a frame of reference for suitable investments and their oversight. In practical terms, governance is the setting of an investment policy, objectives and limits; then reviewing performance and compliance. Creating a clear set of key performance indicators enables progress to be measured.
Judging progress over time is part of the committee’s remit, as well as recommending and approving policy changes, which then need to be executed by managers and teams.
Structure of an investment committee
While there is no hard and fast rule for who should sit on the investment committee – especially as there can be a degree of proportionality to reflect the size of the firm, number of clients and the funds under management – one thing is clear: the focus should always be on ensuring good customer outcomes. This in turn will help identify the key stakeholders. A typical investment committee often comprises:
- Investment managers (i.e. those individuals performing CF30 function, responsible for managing client portfolios);
- Investment advisers;
- Those with significant influence functions/compliance oversight (i.e. CF10); and
- Any individuals responsible for investment research.
It may also be appropriate – particularly for firms with significant assets under management – to consider an external party with sufficient knowledge and experience to sit on the committee. In a similar way to the role of a non-executive director, this can act as an additional control, as it provides an opportunity for independent challenge and input.
To ensure there is no confusion as to the responsibilities of the investment committee, it should be given clear terms of reference which defines its purpose, scope, structure and outputs.
An Investment Policy Statement will also need to be prepared, which covers a variety of issues including:
- Outline of the portfolios and their investment objectives;
- Criteria and procedures for selecting investment options; and
- Procedures for ongoing review and monitoring.
A suite of KPIs can then be derived to help the committee to measure and review portfolio performance.
This is obviously just a very brief snapshot of the important work involved in establishing an investment committee, and there is not space to cover the operational considerations. However, here are some examples of best practice. In our experience, a good investment committee has the following attributes:
1. 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.
2. A clear definition of what success looks like for the portfolio.
3. A clearly defined investment strategy house view, based on reasonable assumptions around expected returns and exposures
4. A straightforward and clearly defined process for selecting investments for addition or removal from the portfolio. As 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.
5. A culture and structure where diversity of experience and opinion is encouraged.
6. A commitment to follow the processes set. A committee’s terms of reference and investment policy statement are only part of suitable systems and controls if the committee operates within the boundaries it has set itself.
The only thing worse than having no systems and controls is putting them in place and not following them. Firms should therefore consider establishing a suitable compliance monitoring framework to review the output and operation of the investment committee. Finally, a reminder, that while advice firms can outsource some of their risks, they cannot outsource their responsibility. Never underestimate the importance of getting the right systems and controls in place.
Linda Preston-Todd is head of bespoke solutions at Bankhall