Monday, May 27th, 2013
investment committee doctor

Today marks the fifth anniversary of this blog, the start of which kicked off a writing spree that has amounted to over seven hundred original blog postings, newsletters, and articles for investment websites and publications.

The topics cover a wide range of investment concerns, but I often find myself at the intersection of investment process and communications, as I do today, contemplating “the table,” which has appeared previously in these essays:

rational-choicesIt shows up again because of a dinner I had in March with Michael Kitces.Nerd’s Eye View | Kitces is a prolific writer and speaker about the financial planning profession and important issues for advisors and their clients.  We were talking about the explosive growth at many advisory firms and the challenges that result from that growth.  (The day before our dinner, Investment News had published an opinion piece of mine on the investment aspects of those firms.Investment News | It was titled, “The other side of your practice.”)  Kitces thought that many advisory organizations were struggling to create effective investment committees and, because of my experience in dealing with the salient issues, urged me to become the “investment committee doctor” for them.

The table is symbolic not just as the locus of important discussions at advisory firms, but organizations throughout the investment ecosystem.  Even as many interactions become virtual (making some aspects of communication easier and many harder), the predominant forum for considering important issues is a gathering around a table of some sort.

Consider the trustees of an endowment, for example, or the employees of a manufacturing firm charged with structuring its 401(k) plan, or the board of a private foundation.  Whether there are billions of dollars under their purview or thousands, they are expected to work together to make prudent investment decisions on behalf of others.

Similarly, many investment organizations have committees that play a part in decision making.  In some situations, they are on the front lines, as when a team works together to manage a portfolio.  At other times, the people around the table are serving as gatekeepers or overseers, selecting approved securities or managers to be used by others, determining asset allocation ranges, or evaluating performance and risk patterns.  In some cases, an “investment committee” can be more of a platform for the exchange of ideas on investment topics rather than a decision making body.

What makes for an effective committee?  A clearly-identified purpose and range of duties — and a shared set of investment beliefs to guide the members in their decisions.

Unfortunately, it’s hard to have functional decision making within a dysfunctional culture or to have a committee fulfill its role in an organization where the leader is prone to usurp, distort, or discount the work of the committee.the research puzzle | As an example, see the section of “thus spake the king” concerning the consideration of a consultant’s report.  Now many years after that incident, I recently heard a virtually identical story about the same leader doing the same thing in a very similar circumstance.  Destructive rather than constructive.  Such organizational diseases are particularly hard to cure, as the person with the power to alter the course of the disease is the one who actually perpetuates it.

An investment committee’s role should be clear to all.  Who is at the table?  What ideas are brought to it?  How are they analyzed?  How are they discussed?  How are decisions made?

If the interpersonal dynamics of the group are problematic, it can be difficult to coax the right issues out of hiding and onto the table.  What can show up in an instant?  “Fact-deficient, obfuscating generalities” (FOG),Farnam Street | I first came across the acronym created by L. J. Rittenhouse in a posting on the excellent Farnam Street blog. which most of us are prone to use when presenting our opinions to others.  Much too often, the light of day can’t shine through, to say nothing of inspired decision making.

The table should not be a place to spout opinions into the air.  It should be a forum where individuals with divergent skills come together in common purpose to make good decisions.

I hope that your investment committee fits the latter description rather than the former.  (You know where to find me if you need a second opinion.)