Bullish battles: How IFAs are tightening up investment decisions

Who holds the power when advisers make investment decisions?

The way advisers make investment decisions is coming under increased scrutiny as IFAs look at how they can ensure they make the right calls.

In today’s ever-changing investment landscape, many have formed investment committees to pool expertise. Committees may have a different mix of personalities, splitting asset allocation and other strategic decisions into different groups. But what makes the perfect line-up of decision makers?

Experts argue advisory investment committees are still relatively new and some conflicts and shortcomings may emerge.

It is understood the FCA is still on the hunt for cases where firms have failed to get hold of accurate customer data to make informed decisions at a committee level.

The role of the chair in the committee and who has final sign-off is also being widely discussed, as is the need for objectivity and impartiality, even when advisers are in a one-man band or part of a network.

Money Marketing examines the structures IFAs have in place to decide on investments and how these can be made as effective as possible.

Objectivity challenges

Plan Money director Peter Chadborn says it is important for advisers to have their own level of influence in the committee and claims this can’t be achieved if firms are part of a network. He says: “If we were a member of a network I would be reluctant to be led by them. It is a bit like asking a provider to do the research for you which I know some people might do.

“It doesn’t mean it can’t be done in-house. If a firm is made of three advisers and one favours that particular platform, it doesn’t mean it is not impartial, but there needs to be something that proves that it is.”

Plan Money uses Vanguard and Dimensional’s funds and therefore its investment committee only choses to meet once a year. It has three advisers and among those one is a fellow of the Chartered Insurance Institute and the other two are directors. The objectives and conclusions of the committee are sense-checked by an internal compliance manager who does not sit on the committee.

Chadborn argues the committee’s objectivity is also challenged when it comes to one-man band adviser firms.

He says: “If you are a one-man band and you said I am the investment committee, that is no different from an adviser just picking what you want to use, so in that instance you want to partner with someone else to provide some kind of insight.”

Adviser view: Ian Else,
financial planner, Ovation Finance
An investment committee should not try to be too clever, it should keep it simple and have its own terms of reference and do its research. If you don’t have the knowledge, then ask a third-party firm to help. Our investment committee is made up of all the advisers at the firm, the investment managers and third-party research people. It meets on a monthly basis to do the first call list on funds. The selection has strict criteria such as size and managers’ tenure.

Red Circle director Darren Cooke says one of the reasons he left Intrinsic was because of the restriction on investment decisions. Cooke is now the chair of his investment committee, given he is a single adviser firm, but also takes external guidance.

He says: “I am the investment committee but that doesn’t mean I don’t discuss with other people. When it comes down to the decision of my portfolio it is me that makes the decision but it doesn’t mean that I don’t take input from other people.

“I sit as an observer on another adviser investment committee so I get some input from them. But when it comes to doing the review and picking the funds, that is down to me.”

The right experts

Square Mile investment consulting and research director Jamie Farquhar says running an effective investment committee is equally important whether decisions are made in-house or by an external discretionary manager.

Farquhar says: “You have the same responsibilities from an oversight and governance perspective, whatever business you are, to ensure you have all the support and that it is managed in the right way to meet the client’s needs from an investment perspective and a suitability perspective.

“What you need to try to achieve is a diversity of opinion within your committee without your committee becoming stymied by having too many people, so your choice of individuals you invite to take part in an investment committee is really critical.”

He argues that between two and 10 people would be an “optimum number” for an investment committee, although it depends on each business.

What investments do independent advisers have to consider under Mifid II?

The investment committee at Gibbs Denley Investment Management is made up of 10 people. It is independent from the board but shares some members with it. Investment manager Tom Sparke says having external or internal members of the firm on the committee is not necessarily a distinctive factor to preserve objectivity.

He says: “Experience, qualifications and relevant job roles all play a part in the selection process. If the right mix of these qualities is present it shouldn’t matter too much if they are internal or external.

“New entrants have been evident every year in recent times and have brought fresh perspectives and a new critical eye. The investment committee meets quarterly, or more often if circumstances require it.”

Momentum head of investment management James Klempster says for the committee to function properly it should never lose focus on the purpose of its existence.

Having products targeting specific outcomes helps the committee achieve this, he says.

Klempster adds: “In firms with more disparate suite of aspirations it can be difficult for the investment committee to remain as focused because there may be a variety of different, and potentially conflicting, ways that the committee’s output can be used.

“This purity of purpose helps focus and also reduces the risk of any one viewpoint dominating the committee because all the members are clearly aligned in terms of their needs for the output.”

Momentum’s investment committee does not rotate its members to keep fresh ideas coming, but trusts market changes will throw up new perspectives and challenges. But as advisory investment committees work towards their objectives, the FCA has highlighted issues around a lack of data on suitability.

What you need to try to achieve is a diversity of opinion within your committee without it becoming stymied by having too many people

An FCA thematic review in 2015 found a lot of firms were missing customer information that it would expect them to have to support the committee’s decisions. It is understood this work is still ongoing.

Tilney Group chief investment officer Chris Godding says his committee does not need to focus on client data, because its role is just to provide a range of portfolios for the firm’s investment managers and financial planners.

Sparke says the committee always has “easy access” to the clients’ risk levels and finances if it does need it though.

Leaders of the pack

The common practice in the market is that the chief investment officer or the top investment expert of the firm would also chair the committee, but some argue the role would be better suited to a non-executive to avoid conflicts.

Farquhar says the chair’s objective has to be to represent the best interests of the clients of the business, but having an investment expert as its leader could risk dampening this.

He says: “If the chairs are the investment experts, then all the other members of the investment committee are likely to defer to that individual in terms of the decisions and, therefore, you’re not achieving your objective as a committee.

“Every business should think very carefully about the individuals that they have on their investment committee and about who chairs it because the primary role of the chair is to encourage open debates in decision making.”

Psigma chief investment officer Tom Becket is the chair of the investment committee at the wealth manager. He set up the group’s investment committee two years ago to add macroeconomic views into its regular strategic asset allocation committee.

Becket says the reason he leads the committee is because of his deeper understanding of the different personalities sat down at the table and because he has “the most linkages” among them.

He says: “If you can put together people who are able to speak their own mind and recognise that it is a group collective approach I think it works fine. It depends on the personality as much as anything else.

“You have to recognise what the point of the investment committee is: to help shape a long-term structural asset allocation for clients in the firm and frankly the person who better understands that is probably the CIO of the business.

“It works well for us but we would be flexible if that needs to change in the future.”

Time for a fresh look at investment committees

Godding says the committee’s objectivity depends on the ego of the chair and the quality of the evidence and research presented by its members at each meeting.

He says: “The parties responsible for each agenda item need to be given enough time to prepare and their conclusions should not be a surprise at the committee. Ultimately, the chair should be a benign dictator who listens to ideas and then sets out the conclusions.

“If the agenda is weak and the preparation poor as a result, the conclusions will lack objectivity and be largely pointless.”

Klempster says having the most experienced investment person as the chair of the committee is to be expected but adds that more junior members at the firm are also highly valued within the mix.

He says: “Too often we hear about committees that become dominated by one individual and so it is important to ensure that, firstly, all members know that they are part of a decision-making team.

“We also look for members who are sufficiently humble to know that other views are just as valid as theirs.  Sometimes the simple questions are the most difficult to answer and a perspective that is naïve to the biases that can come from years in the profession brings valuable challenges to the table.”

The final say

Investment committees are made up of different personalities and individuals with various skill sets. For advice firms, this often includes paraplanners and external members such as consultants.

The committee at Psigma welcomes regular independent investment consultants and has recently added external US tax policy consultants to guide its decisions.

Becket says: “You need to recognise what you are good at and capable of doing and where you need additional help. You need people who specialise in different asset classes, and people who are focused on different parts of the industry, so we have people who are involved in the institutional and pension side of things, we have people who work on the asset management and people who are involved in proper retail private client investments.”

Becket says before Mifid II came into force this year, external specialists could freely take part to the meetings while from now on they will need to be paid. However, he says the number of external consultants at his committee has not diminished because of the new rules. He says: “We are getting more people because it is a much more complicated world today.”

Expert view

Committees by their very nature have to be consensual with their outcomes, as a result a good investment committee will have some strong debate within it, but offer a united front with their results. Flair and opportunity must be allowed to thrive in a disciplined way via the strong guidance of a chair. A good committee must also ensure all committee members show respect for their fellow participants, and are prepared to listen and consider others views and arguments before a vote is taken to recommend or remove an investment.

We have many investment committees looking at different areas of investment to service the differing needs of clients, and it is important that a good committee takes this into consideration.

As a result a successful committee will have a mix of personnel reflecting diverse investment styles. It is important when producing lists of recommendations for all our clients that the growth investor, the value investor, and the momentum investor are all represented to produce a varied rather than one dimensional outcome.

A good committee must clearly communicate outputs and the rationales for its recommendations to the broader community. To enable the investment committee to work best, the recipients of the output should be able to approach any committee member for further explanation should they require it. Those using the outputs should understand the process and work gone in to making decisions and judge based on the success of outcomes.

Investment committees thrive in firms where they are not wholly prescriptive. When prescription is mandatory, resentment can build up, particularly when things go wrong as we know they do. Investment committees should be thought of as a guide on a hike through the countryside, with a route that can change, rather than a forced route march. On this theme, it is important for a good investment committee to be able to admit their mistakes and change tack if necessary.

Tim West is Rathbones investment director and chair of the Pimfa Investor Indices Committee



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There is one comment at the moment, we would love to hear your opinion too.

  1. As the FCA prefers one adviser firms to have a locum, it makes sense for the investment committee to include the two advisers. We combine reasearch between our two firms (which each have 2 staff who collate the info we require to make the selections), we then discuss the research quarterly and then end up with an agreed core and satellite range fo funds we are happy to use go that quarter without additional research until he next quarter. It doesn’t mean we can’t and don’t select off the core and satellite range, just that we have to do additional specific research and justification to go (or remain) of panel.
    Both firms benefit from one another’s skill sets. we learn more and can see different fund managers at different times and ask one another questions about something we are not used to, but the other adviser is.

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