Taming Your Investment Committee
“Desperate times call for desperate measures.” —Hippocrates, writing almost 2,500 years ago
About a million years ago—in 2003, to be exact—I wrote a long white paper called “Reinvigorating the Investment Committee” (available nowhere).
In that paper I discussed the origin of the family investment committee and described a long and discouraging list of problems with these committees. I pointed out that the traditional device used to try to keep committees on the straight and narrow (instead of wandering off into dark and uncertain places, as they are wont to do) was the investment policy statement.
I then pointed out why the investment policy statement didn’t work: whenever the investment committee wanted to do something dumb, it just revised the investment policy statement accordingly.
I therefore “invented” the investment committee operating manual, a device whose sole purpose was to keep the committee focused on what it was supposed to do, as opposed to what it wanted to do. The investment committee operating manual was to be adopted by the family, not the investment committee, and simply imposed on the latter by fiat.
Over the intervening decades, I’ve run across many families who use an investment committee operating manual, almost none of whom knows where it came from or, for that matter, cares. The next time I invent something I’m going to copyright it and charge every family a nickel to use it.
Although I thought I was being brutally frank in the white paper, seventeen years of dismal experience has convinced me that in fact I was much too gentle on investment committees. If we really want to tame our investment committees, we will have to harken back to Hippocrates and adopt the following desperate measure:
THE INVESTMENT COMMITTEE WILL MEET ONLY ONCE A YEAR.
Yes, yes, I know what you’re thinking:
“I’ll get sued for breach of my fiduciary duties!”
“My portfolio will blow up and I won’t even know about it!”
To which I respond, with Hippocrates: Balderdash.
The simple fact is that once a portfolio has been competently designed and implemented, the more changes that are made to that portfolio, the worse its performance will be.
A concomitant to that important and iron-clad principle is this one: The more often an investment committee meets, the more changes it will make to the portfolio.
Thus, just to cite an extreme example, if we could observe an investment committee that met every day, we would be observing a portfolio that was on its way to zero.
If you want to stay rich, here is how your investment committee should be managing your portfolio:
- Throughout the year the investment committee will receive investment performance reports on whatever schedule seems sensible: monthly or quarterly in most cases. If members of the investment committee have questions or concerns about the performance, they can email the other committee members, and if the concern is widely shared, a conference call (or the dreaded Zoom call) can be arranged, probably including the family’s investment advisor. Otherwise, nothing happens when these reports are received.
- From time to time your advisor (or, one hopes rarely, an investment committee member) will have a recommendation for you. It might be to fire a current manager, to add a new manager, or to tweak the tactical positioning of the portfolio. The rationale behind the recommendation should be cogent enough to enable the investment committee members to a) approve the recommendations for implementation by email, or b) ask for clarification (by email), or c) rarely, request a call (or Zoom).
- Once a year, preferably off-cycle, the investment committee will meet in person. Since most families work on a calendar year (institutions, which need this advice even more urgently, usually operate on a fiscal year), the in-person meeting should happen in, say, mid-March. At that meeting the agenda would be along these lines:
- Review the existing investment policy statement, especially including the asset allocation design for the portfolio, but with a strong predisposition not to change anything.
- Review the investment committee operating manual and, if necessary, recommend changes to the family (recognizing that most of these recommendations will be—quite rightly—ignored.)
- Review the portfolio’s performance against appropriate benchmarks since inception, over the past three and five-year periods, and superficially, over the past calendar year.
- Review the performance of the managers used in the portfolio since inception, over the past three and five-year periods, and superficially, over the past calendar year.
- If time permits, listen to the advisor’s (probably silly) views on economic and market conditions and the implications of those views for the positioning of your portfolio. But the investment committee should keep firmly in mind the simple fact that if the financial advisors actually knew what was going to happen in the future they’d be rich and wouldn’t have to work for you.
- Adjourn. If the meeting has lasted more than ninety minutes, or if you spent more than eight seconds reviewing the recent quarter’s performance,your investment committee is about to make too many changes to the portfolio!
Finally, and crucially, every investment committee meeting that lasts less than ninety minutes should be celebrated with a cocktail hour.