Investment Committee Best Practices for Wealth Managers

An investment committee (IC) provides wealth management firms a formalized mechanism for improved due diligence, ongoing monitoring, and decision-making.  A good IC aligns organizational goals, roles, and processes and enhances accountability, clarity of purpose, and shared knowledge among the team.   

If alternative investments are an important part of your firm’s business model, you should consider setting up an IC.  Or, if you already have one, you should consider incorporating these best practices. 

Wealth management firms balance risk management with revenue growth.  However, most firms are constrained by resources and fall somewhere on a continuum.   

• Firm-driven approach to manage risk.  In a firm-driven approach, the firm creates and monitors a diversified approved list of product offerings.  The primary goal is risk management while providing financial professionals (FPs) with a diversified variety of suitable alternative investment options.  The firm may take a top-down approach to determine its investment focus and screen product based on its investment criteria (i.e., registration-type, suitability, minimum investment, offering period, investment focus, etc.).   
• FP-driven approach to promote growth.  In an FP-driven approach, the firm reviews products based on FP’s requests.  The primary goal is growth through retention and recruiting while aligning the firm’s limited resources to products relevant to FPs and their investors.  The downside to this approach is that very vocal FPs may disproportionately influence the firms’ product platform. 

Clearly defining the goal and approach for building your product platform will guide your resource planning and procedures.   

Having the right people can make or break an effective IC. It’s important to have qualified, independent, diverse perspectives for robust analysis and decision-making.  Generally, IC roles are filled by executives, department heads, or their delegates.  The following perspectives should be included:  

• Product Expert.  The due diligence officer or person most knowledgeable about the project should present the product and answer any questions.  If the firm has a due diligence team, there should be at least one member of the team that is consistently part of the committee to ensure that the due diligence team’s point-of-view is fairly represented.   
• Risk Management.  This role can be filled by legal, compliance, and/or supervision.  This will help the firm avoid products outside its risk profile and consider how to manage specific risks (e.g., concentration limits, acknowledgment letters, regulatory compliance). 
• Finance and/or Operations.  This role can help identify any unique considerations and ensure the product’s fees align with the firm’s business model and operations (e.g., fee structure, custodians, third-party integrations, reporting). 
• Customer Experience.  This role focuses on the perspective of the FP as the firm’s customer, providing insight into their customers’ product wants and needs.  This can be filled by someone focused on sales/marketing or a respected and knowledgeable FP.   

All members of the committee must be committed to being fully engaged in making decisions that make sense for your firm, your FPs, and your FPs’ clients.  This means that all members are willing and able to put in the effort to understand the product and sponsor from multiple perspectives and participate in robust discussions.             

Your IC should have written procedures that clearly identify requirements your firm is committed to following and guidelines it generally follows.  The procedures should be written as flexible as possible so you can show you did what you said you would do.  Procedural requirements and guidelines should address the following topics. 

• Committee members.  How many members are on the committee?  What perspectives should be represented?  How long does each member serve?  What is the process for changing member composition?  What are the members’ responsibilities?  Does each member get a vote? 
• Screening process.  Who screens new products and sponsors?  What are the criteria or guidelines?  How is it documented and communicated? 
• Review process.  Who does the due diligence review?  What is the scope of the review?  What third parties do you engage?  How are the due diligence findings documented and communicated?  How and when do you determine if a review should be discontinued?   
• Approval process.  How are products presented for discussion or decision-making?  What is the time frame to decide after a product has been presented?  What are the criteria or guidelines for approving or rejecting a product?  Do the criteria and guidelines change for different characteristics of the product/sponsor?  Does the committee need majority or unanimous approval?  Can the committee request additional information before voting?  How do you document project approvals or rejections? 
• Ongoing monitoring.  How frequently do you perform ongoing monitoring? What tools and resources do you use?  What are the key areas of focus?  What are your criteria and procedures for adding or removing products from a watch list?  What are your procedures if something is added to a watch list?  What, when, and how do you communicate to the committee?  What are your criteria for suspending a selling agreement? 
• Committee meetings.  How frequently do you meet?  How long?  Do you meet in person, over video, or via phone?  Who is responsible for scheduling and setting the agenda?  Who is responsible for leading the meeting?  Do you require meeting minutes?  If so, who is responsible for documentation and distribution? 
• Documentation.  What documentation do you require for managing your product platform?  What documentation do you require for each review?  Where is that documentation stored?  Who has access to it?  How do you protect documents subject to confidentiality agreements? 
• FP training and communication.  If a product requested by an FP is rejected, what do you disclose to the FP?  If a product is approved, how is it communicated to the FPs?  Do you share the review status of products in the review pipeline?  What training do you require to sell a particular product?  How do you document it?  Is training supported by a third-party platform, or does the firm need to create its own training materials? 

Create artifacts that support your due diligence process and decisions.  Know what is required documentation and what is recommended.  Know what to store where and how to quickly retrieve it.  Differentiate between facts and opinions.  Include your sources and dates. 

At a minimum, the following should be documented: 

• Portfolio-level management.  This includes your product review pipeline, active product platform including any watch list items, IC meeting notes, and decision log including the rationale for discontinuing a review, approving/rejecting a product, and suspending/reinstating a selling agreement. 
• Product-level due diligence materials.  This includes offering materials, committee memos, third-party reports, information from sponsors, and notes from discussions with sponsors. 

The artifacts validate that you follow your process.  Best practice is to document rejected products.  This helps demonstrate that the IC considers the risks related to the product/sponsor instead of rubber-stamping every product reviewed.   

5. Hold Engaging Investment Committee Meetings 

Make sure people are available and prepared to get the most out of the meetings.   

• Schedule.  Best practice is schedule regular recurring meetings and confirm attendance before the agenda and materials are distributed.  The meeting should be 30-60 minutes depending on how much there is to cover. Meetings should be limited to 3 product reviews, so the IC has time to digest the materials and discuss the key considerations. 
• Prepare.  Create a standing agenda covering the status of follow-up items from the last IC meeting, status of the existing platform (e.g., watch list status, offerings scheduled to close, notable product or sponsor updates), status update on the review pipeline (e.g., prioritization and timing, recommendations on discontinuing reviews), presentation of new offering reviews, and other topics for discussion.  Send a preliminary agenda a week in advance and ask the committee members if they have any discussion topics to add (e.g., industry news, proposed regulations, etc.).  Send meeting materials for review at least a full day before the meeting.     
• Engage.  Whoever runs the meeting should follow the agenda, introduce/present the item, and open the topic for discussion.  Ask each member for feedback, starting with the lowest level and moving to the highest position of authority to help provide a welcoming environment to voice opinions or ask questions.  When it comes time for a vote, everyone should include their rationale.  If there are any follow-up items, determine who is responsible and when the item will be completed. 
• Wrap-up.  Confirm the meeting time and availability for the next meeting to get an early indication if there is a scheduling conflict.  There should also be a general agreement on what products will be presented at the next meeting.  If someone records minute meetings, the meeting minutes should be distributed shortly after the meeting.   

If you follow these best practices, you will feel more confident in your firm's ability to make more informed decisions in line with your firm’s business model and goals.  And hopefully, you’ll find the right balance to manage risk while growing your firm.

Contact Information:

Julie Olsen

Manager

julie@factright.com

(612) 284-4034