By Martyn Wild.
At MARQAM, we’re asked to do a fair bit of portfolio construction. Asset allocation, manager selection and trade execution tend to fill up our day. As an industry we seem to be obsessed with buying, selling and finding ever-more creative methods to deploy capital. However, successful investing is far more than just what you do, it’s also very much about how you do it.
You see, while a solid investment process is critical to long-term wealth creation, it’s not the full answer; far from it. In fact, if we consider the investment process to be the muscles of the 'investment body', governance is assuredly the skeleton from which the muscles hang. We think that governance should be à la mode (in fashion) because done properly, it dramatically improves the quality and consistency of the investment decision.
What is investment governance?
Governance is essentially the supporting policies and procedures within in which the principal function operates. A robust governance framework enables advisers and managers to focus on their key competencies, avoid expensive distractions and, importantly, meet their regulatory obligations in full. In short, far from being a necessary evil, it’s a critical component of your investment success and that of your clients.
Key parts of a robust governance framework
All investment/financial advice-orientated firms require at least the following governance component parts before investing can occur:
1. A statement of Investment Philosophy and Beliefs – this is a document that clearly articulates core value statements relating to the role of the investment adviser/manager. The Investment Philosophy & Beliefs document enables the adviser/manager to define the scope and characteristics of their investment activities. Colloquially, it is an articulation of ‘the way we do things around here’. Comprised of two parts:
a. The Investment Philosophy – structured as a series of statements, the Investment Philosophy describes the fundamental tenets to which all investment activities must adhere. Examples could be a focus on portfolio construction as the primary driver of returns or whether to pursue active management. As a consequence, once established they are rarely (if ever) changed
b. The Investment Beliefs – a detailed articulation of the principals by which the adviser will undertake investment related activities. Examples might be a focus on long term investing or preference for outcome-based solutions rather than static growth portfolios like ‘70/30’ balanced funds. Beliefs are challenged in light of new data and experience so as to maximise the consistency and quality of investment related activities
2. An Investment Committee – it is crucial that all investment-led businesses maintain a body that oversees the investment function. The committee sets objectives and ensures that they are delivered upon by the executive. While there is no universally agreed framework as to what makes a ‘good’ investment committee, best practice suggests that it should demonstrate the following characteristics at a minimum:
a. Clarity of purpose and the resolve to drive improved client outcomes – being clear about its core values (not least its Investment Philosophy) and how it defines success
b. Diversity in Committee member background, but with the majority having distinct and verifiable investment experience
c. A common understanding of the roles of each Committee member and a clear determination to challenge conventional wisdom using facts and verified theory (not opinions)
d. Maintain a well-articulated governance approach (sometimes referred to as an Investment Policy Statement) for managing the portfolio, the hiring and firing investment managers, execution of the investment strategy and evolving the investment process
e. To provide guidance to the managerial team in accordance with the points above – colloquially stated as; ‘committees guide, they do not decide’
3. A charter - at its most basic level, the charter articulates the overall function and operating rhythm of the committee as it strives to deliver the best possible client outcomes. It is the mechanism by which the Investment Committee executes decisions. The charter also facilitates effective benchmarking of those decisions and ensures accountability
Follow the latest fashion!
As the need for quality financial advice continues to grow, the role for an effective governance framework has never been greater. With a rapid increase in the adoption of managed accounts, planners have even more to think about as they expand outside their traditional role of advice to a full-service proposition. Making money, while never easy, is that much harder without a supporting governance policy.
Don’t get caught in the wrong outfit.
For more information or to talk to a member of the MARQAM team, please click here.
MARQAM is a privately-owned, boutique consulting company focused on providing superior investment outcomes for clients and greater profitability for businesses. We are not affiliated with any other financial institution
Disclaimer: The information provided here is for interest purposes only and does not constitute investment advice or a recommendation of any kind.