All too often governance is considered a dull topic but time and time again it proves critical for outfits of all shapes and sizes. Take Fifa, for example. It would seem ex-president Sepp Blatter did not pay a great deal of attention to governance and look where that has left the world of football. The board of Volkswagen may also be regretting a thing or two in this arena.
Governance poses no shortage of challenges for the financial services sector, too, where the regulator – driven by suitability – requires advisers to demonstrate they are looking after the best interests of the client at all times. A burgeoning issue for many adviser firms is the requirement for due diligence and oversight of third-party or sub-advised services brought about by the launch of centralised investment propositions.
The issue of effective governance is, of course, as pertinent for sole traders as it is for larger practices, whether or not they have established an investment committee. It is also equally important for advisers with existing committees to regularly check the group is still relevant to the proposition and processes used to service their clients.
Governance certainly should not be dismissed for advisers that have moved to a Cip. In many ways the due diligence and oversight an investment committee brings in this situation is even more critical.
In both establishing and managing an investment committee there are three main areas to consider in order to ensure the process runs effectively, observes best practice and, crucially, serves the best interests of the clients.
First up is the role and purpose of the investment committee. It may sound simple but this is a critical stage in both setting up the committee itself and for ensuring the group is fulfilling its ultimate purpose. Some objectives, such as monitoring charges, are likely to prove more tangible than ensuring suitability, for instance. But the role of the group can be broken down into three clear categories: maintaining the best interest of clients, outlining and overseeing the group investment strategy and monitoring/mitigating group risk.
The next logical step is to start forming the structure of the investment committee. Choosing the right people for the role – both internal and external – is essential, with each member bringing a unique balance to the group. Advisers should ask themselves a number of important questions during this process, including what constitutes a quorum and how often individuals will be rotated to keep things fresh. More broadly, what is the committee’s relationship to other committees and to whom will it report?
Last but by no means least in terms of importance is to put in place a clear process for investment committee meetings. The key here is to be methodical and structured with diarisation, minutes and actions, and to carefully consider if and how to distribute the output internally and to clients. These may be details but they can mean the difference between whether or not the committee is ultimately able to fulfil its role in the eyes of the regulator. With the FCA wealth management review due to get under way in the first quarter of next year, there has arguably never been a better time to be on the front foot.
It may be true in an industry where oversight and regulation play an ever increasing role the concept of a committee often conjures up negative thoughts: “A group of unfits, engaged by the unwilling to do the unnecessary” being just one definition flagged up in a Google search. However, channelling efforts into the set-up of an investment committee should allow advisers to remain ahead of the competition while at the same time protecting the value that has already taken time and energy to build into their business.
Jamie Farquhar is director at Square Mile Investment Consulting and Research