Until 2011, Stepp & Rothwell didn't have an investment committee. "Two of our firm's principals would talk to each other about investments and make the decisions," says Kathy Stepp, one of three principals at the financial planning firm, based in Overland Park, Kan. "However, our firm had grown to the point where we wanted more structure, so we formed an investment committee: the three principals plus one of our other financial planners."
There are also four people on the investment team at the Tarbox Group, a wealth management firm in Newport Beach, Calif. At ARGI Financial Group in Louisville, Ky., the committee has seven members, according to Ron Butt, a senior partner at the firm.
RegentAtlantic Capital in Morristown, N.J., has 10 members on their investment committee, ranging from new hires to experienced employees, according to Chris Cordaro, the firm's CEO and chief investment officer. "The common thread," he says, "is that we are all passionate about investing. You must have a CFA or be working on it to demonstrate your passion."
At Mosaic Financial Partners, an advisory firm in San Francisco, the group is larger still. "All of our firm's financial professionals are on our investment committee," says the president, Norm Boone. That totals 12 people: six financial advisors, four financial planner-analysts and two investment specialists.
These investment committees' schedules vary widely, as well. Stepp & Rothwell holds weekly meetings, RegentAtlantic and Mosaic meet every other week, ARGI Financial's committee convenes quarterly "unless a special meeting is called by a member for a specific reason," as Butt puts it.
Despite such differences, the financial planners interviewed all stated that having an investment committee provides genuine benefits and that their firms' gains go beyond finding effective asset allocation and selecting investments.
At Stepp & Rothwell, for instance, creating an investment committee was part of a larger business succession plan, in which the company eventually will be owned by its employees. "As part of the arrangement," Stepp says, "we're asking employees to help with some management tasks. They're not just seeing clients anymore. Thus, one of our planners goes out to lunch with the principals each week, to discuss investment strategy."
Stepp says her firm has no model portfolios, so it doesn't make across-the-board changes to clients' holdings. "Clients have individual investment policy statements," she says, "and they meet quarterly with a planner at our firm. Before the meeting, the planner can get together with a member of the investment committee and determine how the committee's decisions will affect the client's portfolio. That way, our planners are all on the same page when they meet with clients."
Similarly, Mark Wilson, a vice president at the Tarbox Group, appreciates having "one party line" firmwide to present to clients. "Our team members have different points of view," he says. "One focuses on the economy, for instance, another on valuation. We just added a new member who is from the endowment world and is used to thinking of one big portfolio, with no taxes. We aim for a consensus view, in the belief that the team is smarter than any one person."
Butt lauds a diversity of opinions. "Fifteen years ago," he says, "the investment committee was just me. Over the years, I've realized it is not in our clients' best interest to have all decision-making and knowledge of their portfolio management concentrated in one person. As the firm has grown and accumulated talent, it has benefited everyone to engage in a shared, formalized, decision-making process."
At RegentAtlantic, however, the investment committee has gotten smaller. "Originally," Cordaro says, "our investment committee consisted of all the professionals at the firm. As we grew, this became unwieldy. We ended up with too many people just sitting in the back of the room; they were content to let me do what I wanted and offered little push-back. That's not healthy - you need disagreement to be sure you are putting forth the best ideas and that your thinking is being challenged on an ongoing basis."
With the investment committee now CFA-heavy, Cordaro has found the kind of questioning he seeks. "I want people on the committee who will annoy me, disagree with me and see the world a little differently," he says. "We have that healthy debate with the current size of the committee. If there is not enough debate, our committee chair will assign one person to each side of an argument and the next meeting will be a steel cage match." Recent matches have covered counterparty risk in ETNs and hedge-strategy mutual funds.
Besides building consensus from diverse views, committee meetings educate the participants. "The people who meet with clients are on the committee," Boone says. "They'll hear arguments and counterarguments. Therefore, the committee members will be fully familiar with the rationale for our investment decisions, and they'll be prepared to answer questions they get from clients. The junior professionals especially get to learn more about investing."
MAKING THE CALLS
Still, the primary purpose of establishing a committee is to set the firm's investment policies. "We develop consensus on what we'll buy or sell," Boone says.
At ARGI Financial, the investment committee held special meetings last year to address the European crisis and its possible effect on clients' portfolios. "We decided to withdraw the funds we had in a Europe-only ETF," Butt says, "due to the likelihood of a European recession."
When equity market volatility surged in mid-2011, the ARGI Financial investment committee remained bullish, citing strong fundamentals. Consequently, it decided to overweight large-cap value stocks paying healthy dividends in some portfolios because such equities' yield provides downside protection. Specifically, the committee opted to buy the WisdomTree Dividend Ex-Financials ETF, which offered a 3.2% yield and a nearly 100% correlation to the S&P 500, providing upside exposure.
At Tarbox, a dedicated emerging-markets fund was recently added while the exposure to small-cap U.S. stocks was reduced. Within the alternatives asset class, real estate and commodities have been trimmed while hedge-type vehicles like arbitrage and managed futures were bolstered.
"Even if a change is considered 'urgent,' it might take some time to implement it for our clients," Wilson says, "as we go through the tax implications. Investment changes not considered urgent may wait for the time we meet with a client."
Stepp says that investment committee decisions at her firm might be relatively straightforward, such as replacing a particular mutual fund with another entry in the same category. "Other changes might be more complicated," she adds. "For instance, on our reports we've been using index price changes as benchmarks. We've been talking about using index total returns instead, including reinvested dividends. We're working on finding the best approach."
A well-functioning investment committee can reach accord on thorny issues and then prepare the firm's planners to explain any revisions to clients. "It's not inexpensive to take our professionals into regular meetings like this," Boone says. "However, we have been doing it for 10 years and we've absolutely found this approach to be worthwhile in terms of skill-building, culture-building and creating a common language."
Donald Jay Korn is a contributing writer in New York for Financial Planning. He also writes regularly for On Wall Street.
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