Too many investment committees fall into common traps like chasing performance and groupthink, instead of learning how groups can think effectively, says Tom Brakke, an Excelsior, Minn.-based chartered financial analyst who helps organizations make better investment decisions.
If you have a choice between your best investment person and your best facilitator [to lead your committee], choose your best facilitator, Brake told attendees at the Advanced Personal Financial Planning Conference this week in Las Vegas sponsored by the American Institute of CPAs. If you want to fix your investment committee, you have to start by learning how decisions are made within groups . The most important responsibility of the CIO is to build an organization that can make good investment decisions.
The first thing Brakke says he advises firms is to reflect on the members of their committee. A diversity of talents, experience and perspectives is important on investment committees, he says.
Consider the professional background of your members, he adds. How many have CFPs, CFAs, CPAs or other designations? How many are Republicans or Democrats? If everyone on your committee has undergone a Meyers Briggs personality assessment, how many different personality types occupy the seats on your committee? Are any members stars, with impressive credentials or track records? If your firm is family run, do you have two generations of the same family on the committee?
All these factors will impact the way a committee will make decisions together, he says.
And consider the speed of each member Brakke advises.
People move at different speeds, he says. You have the 15-mile-per-hour person who got to the meeting early and has read through all the materials. Then, we have the 50-mile-per-hour person who came to the meeting late and didnt get through all the readings.
The latter probably just got off a phone call and has a great idea to recommend loudly, Brakke says, but dont let that bluster overshadow input from a quieter, thoughtful committee member.
The 15-mile-per-hour person probably has the exact perspective you need, he says.
Brakke, who has worked with investment committees of investment managers, charities, foundations and planning firms, says the problems of group dynamics are consistent in every setting.
He offers the following suggestions:
1. PROCESS Focus on process, not outcomes. Most firms despite what they claim make the mistake of chasing performance rather than designing and sticking to a process that works for them.
2. ROLE - Define clearly what your investment committees role is within your firm. Is it governing, advisory, managing the next level down in the organization or operating by making investment decisions? I would argue that most organizations havent done this and, so, they have set up their investment committees for failure, according to Brakke. In general, a committee might have a combination of these functions.
3. BELIEFS - Ask if your investment committee is aligned with the beliefs of your firm? For example, does your firm believe that markets are inefficient or efficient? Either conviction will lead to very different decisions. The investment industry is an industry of herding, Brakke says. If you havent thought through where you fit in then you wont make good decisions.
4. SIZE - Keep the size of your committee manageable. Although some firms have committees with just three people, the sweet spot is four to six, according to Brakke. But when it gets bigger than that, [say] up to nine or ten or more is probably a recipe for dysfunction.
5. NO OBSERVERS - Dont allow observers. They are problematic and dont contribute constructively to effective decision-making.
6. MEETINGS - Meet face-to-face. Virtual interactions are much more difficult, much more tricky, Brakke says. It just makes it harder to make good decisions for a variety of reasons.
7. EXPECTATIONS - Ask yourself what you expect from each member and communicate that to them.
8. PREPARATION - Establish that all members read and prepare for upcoming meetings ten days beforehand. So, the exploration occurs in advance of the meeting, Brakke says. Create a cultural norm that says, We come in prepared. We dont waste our time at the meeting with most of the things that people waste time with in meetings. We avoid presentations. We dont need a 15-minute presentation of what we already know.
9. ENVIRONMENT - Create a safe environment where people are willing to share their views. When people feel free to share that information, then the group makes better decisions, Brakke says.
10. FOG - Avoid FOG, also known as fact-deficient, obfuscating generalities, he says. Some firms assign assumption hunters or designated devils advocates to challenge the accepted obvious. But, eventually, no matter how hard committees try, the fog rolls in. We have to push each other on what we know and what we dont know, Brakke says.
11. SHARE - Circulate committee decisions right away. Dont wait 90 days.
12. EVALUATE - Then, review those decisions over time to evaluate and improve the process. In this business we confuse skills with luck, Brakke says. Judge the process more than the outcomes.
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