Adviser groups of all sizes are finding that having an investment committee (IC) with at least one independent external member really pays off despite the costs.
Minchin Moore managing partner Mark Minchin, an independent practice owned by its 14 partners, says the IC is a “core component” of the design of the business.
“It ensures that all decisions are carefully researched and considered, and nothing is implemented in haste,” Minchin tells Professional Planner.
“It is a key pillar of our entire business value proposition and not something that we see as optional. No doubt it is expensive. It consumes lots of the time of some of our most experienced and well-paid staff, but it provides enormous benefits.”
Minchin adds that not only does it result in a rigorous and robust process, but the ongoing dialogue in the IC promotes communication of key concepts.
“The IC actively disseminates the outcomes of its work throughout our practice so that all the advisers are informed and knowledgeable about the basis for directions taken,” Minchin says.
“This promotes constant learning and provides advisers with what they need to explain and reinforce concepts with clients.”
Minchin Moore’s IC is chaired by its chief investment officer. He is supported by an independent member, Steve Garth, as well as five of its partners. The firm also has a centralised investment team which mechanically implements the decisions of the IC and runs portfolios.
“Advisers are kept ‘off the tools’ so that they can focus on adding value through financial strategy and client communication,” Minchin says.
“This creates efficiencies, reduces errors and promotes a more professional relationship with clients. The separation of investment team from client interface is important as it creates accountability for advisers – they can’t cave to client whims and behavioural indulgences. They must be firm and disciplined in coaching clients for strong long-term outcomes.”
ICs, however, don’t only benefit larger or mid-sized practices.
“Our IC has helped us punch well above our weight,” Joe Stephan says, a director of Stephan Independent Advisory, a Melbourne-based firm that has two advisers and works with family businesses.
“In small practices, one can be blind-sighted or have many biases when it comes to investment decisions on stocks, managed funds or whatever. To remove some of those biases, it’s important for your IC to have a paid external party who asks the right questions and probes and probes to ensure there is some rigor around your investment approach.”
Stephan’s IC consists of the firm’s two directors and an external consultant.
“Our clients have a high level of complexity,” he says. “They have greater amounts of wealth and specific needs so we cannot just rely on external research, which most advisers do.”
“We still subscribe to external research. But with our IC, we have the capability to research investments ourselves. We can then look at external research as more of an ancillary rather than the primary decision-making tool.”
‘You can’t be investment-focused without it’
Although some like Minchin note the advantage of an IC is that it gives advisers more freedom to focus on client strategy, investment-focused advice firms can also benefit from the model.
Royston Capital director Chris Boag believes having an IC ensures better risk management and returns. “You can’t be investment-focused without it.”
He describes his Melbourne-based firm, which was carved out of the Mutual Trust family office, as being closer to a funds management business than a financial planning business and believes that an IC may benefit some businesses more than others.
“It comes down to what is the focus of that particular practice,” he says. “Our focus is on investment advice. Other firms may have a focus on the broader financial planning strategy and may have no need for an IC.”
Royston Capital has two advisers, one dedicated in-house support member and outsources a lot of its back office. Its IC includes himself as chair; Ofer Karliner, a portfolio manager at Magellan Financial Group; and Hong Kong-based Victor Yeung, the chief investment officer of Admiral Investment who provides guidance on China and property/real assets.
The IC’s many other inputs include data from Morningstar, and the research of MST Financial for macro and strategy research.
ICs often have a charter and well-documented investment philosophy and typically hold formal quarterly meetings, other regular meetings and ad hoc discussions in between.
Michen says it’s important to have a philosophy and charter that focuses the IC conversation through a disciplined framework.
“We’ve learned over the years that committees can talk endlessly about markets, for little benefit, if they don’t have a disciplined framework to target conversations and research in areas where we can make a difference,” Minchin says.
“In our case, we focus on what we can control and try to avoid meandering conversations about short-term events or the future direction of markets, rates, currencies and other unpredictable factors.”
Stephan says his firm’s IC investment philosophy is always adhered to and enables the firm to articulate its investment approach clearly to clients and inspire their confidence.
“It’s been well thought out and there’s no storytelling or reliance on your ability to communicate. The very fact that you have the investment philosophy and documents in place provides the evidence behind why you’re delivering this advice.”
A good night’s rest
Stephan says the IC helps him sleep at night and clients rely less on the trust factor with the adviser and more on the philosophy that they have bought into and trust.
Tabitha Tworek, a director of Insight Wealth Planning, expresses similar sentiments. “The IC goes a long way to ease my mind personally and the advisers that I work with that the magic is not in one adviser’s head and that key person risk of ‘how portfolios are constructed’ relies on one voice.
“It also means that in various market conditions, we can have confidence that the robust investment strategy is being reevaluated and challenged with input from experts in various disciplines to come together and proof test that one person’s bias view is not an override.”
Tworek’s Newcastle-based firm has four advisers and 10 other staff members.
Its IC is provided by its licensee, Diverger, and has five core investment committee members, each with an area of speciality. This includes a chief economist, an analyst, an extremely experienced financial services executive with compliance and governance as a background, an adviser who works directly with clients and a professor in behavioural economics. Guests are also invited to the IC.
“Our firm couldn’t possibly afford to recruit experts of this kind directly, so it’s great to leverage these services incorporated into model portfolios that are available on multiple platforms and methods for efficiency and implementation,” Tworek says.
“It gives me so much comfort to know that I can meet with clients and focus on the strategy that is important to them and that I am not working with a flawed model where time in front of clients is a distraction from trying to be on top of stock research. I am not a broker and have no desire to be. This is a much more sustainable model.”
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