Scott Welch, chief investment officer at Dynasty Financial Partners, has written an article outlining factors behind the increasing use of investment committees among RIAs.

The trend of advisors going independent continues – as more and larger teams make the break away from wirehouses and banks, the narrative grows stronger – better economics, customized business model, less conflicts, fiduciary standard of care for clients, and an open architecture of solutions.

But with independence comes potentially new responsibilities and business model requirements. From an investment perspective, as a newly-formed RIA, how do you plan to invest your clients’ money? How will you make the appropriate decisions? Who will oversee and evaluate those decisions?

The answer is an investment committee. While not required by regulation or law, forming and maintaining an investment committee is a clear “best practice” that all advisors should embrace.

The purpose of the investment committee is to formalize the investment decision-making process, integrate multiple points of view into those investment decisions, discuss changes and evolution of the investment process, and provide a feedback loop on past decisions. The result is a more disciplined investment process, a forum for the free exchange of ideas, and a clear historical record of what decisions were made and why, and a more robust investment solutions for the end-clients.

In addition, when the SEC walks through your door to perform an audit, they are likely to ask how you make investment decisions on behalf of your clients.  They are also likely to request your policies and procedures in place for making those decisions and verify that you are following those policies and procedures. An investment committee and its associated historical notes and minutes provides tangible evidence that you are making investment decisions in a professional, disciplined and fiduciary manner.
 
So what represents “best practices” with respect to forming and running a successful investment committee? Here are some ideas:
 
1. Develop an investment committee policy manual that captures the purpose of the committee, who will be part of it, how often will it meet, what decisions is the committee responsible for, and a process for evaluating past decisions on an ongoing basis. This manual will not only create an organizational “memory” that does not fade away as current members move on, but also a disciplined road map for the ongoing running of the committee after the initial excitement of forming the committee settles into a routine aspect of running the business.

2. Include outside members in the committee. Ideally, these will be investment experts in different areas of the investment spectrum. Including outside members ensures greater cognitive diversity within the committee and helps to prevent internal “group-think.”

3. Formalize the process of running the committee:

- Formal agendas distributed ahead of time so members have time to prepare, review any collateral material, and arrive at the meeting ready and able to be active participants;

- A formal organization to the committee structure – a chair who is responsible for running the meeting, a voting process for arriving at decisions, how to handle conflicts and “hung” committees, and a committee secretary to take minutes from each meeting. [Note: it is not required, and actually desirable, for the minutes to summarize or capture the dialogue and debates with in the committee on any given question – it is easy to make a mistake and it can inhibit free exchange by committee members. All that is required is to summarize the questions that were debated and the outcome of the debate (approved or declined).]

4. Each committee meeting should begin with a summary of the minutes from the previous meeting, an evaluation (when appropriate) of previous decisions, a full discussion of the current meeting agenda items, any votes that are required, and a formal closing of the meeting by the committee chair.

5. The committee secretary should complete the minutes, have those minutes reviewed and approved by the chair, distributed to committee members, and kept in a permanent file for future review by the committee, regulators, auditors and (if appropriate) clients.
 
This is just a partial list and there is plenty of industry literature that dives into much greater depth, but the takeaway is that the successful formation and formal and disciplined running of an investment committee is a critical (but not exclusive) step to ensuring the success of the investment component of successful RIAs.