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Delegating or Outsourcing Asset Duties? Watch Governance Anyway

It is not unusual to delegate or even outsource functions investment committees commonly perform. But taking that step doesn’t mean washing the hands of all involvement with governance. A recent blog post makes suggestions regarding what can be done to continue to monitor and exercise active involvement in how plan funds are managed. Advisors may find it instructive to know the nuances of how their clients approach fiduciary responsibilities, especially as they way they perform governance functions changes.

In “Governance Checklist for Today’s Fiduciaries,” Michael Thomas and Peter Corippo of Russell Investments outline what duties still must be fulfilled and offer suggestions for exercising oversight.

Unchanged

Even if functions are outsourced or delegated, there are duties that do not change, Thomas and Corippo argue. “First, the investment committee should retain responsibility for documenting the objectives, constraints and risk tolerance on behalf of the sponsoring organization,” they write. An example of such an objective, they say, is supporting a 4% annual spending policy, while preserving the funds’ absolute value after accounting for inflation.

Constraints. Thomas and Corippo suggest that a fee budget, eligible asset classes/strategies and bands for rebalancing or tactical tilting all can serve to constrain an investment committee and its designees from certain actions that will affect the plan.

Risk Tolerance. This is often a component of objectives and constraints, say Thomas and Corippo; they add that it typically is expressed through a strategic asset allocation approved by the investment committee.

Define Success. Thomas and Corippo also suggest that an investment committee define how the investment strategy will be measured to determine whether it is a success and monitor the results against the standards it sets.

Changes

Shift in the design and implementation of investment strategy is the biggest change in an investment committee’s responsibilities when outsourcing or delegation occurs, say Thomas and Corippo. “We think that best practice is to push decision-making to the level where the expertise resides,” they write. “A practical application of this principle is that the investment staff or OCIO partner decides on which sub-advisor to hire,” they further suggest.

But if it does so, how can the investment committee meet its fiduciary duties? Thomas and Corippo suggest that the general answer is for the investment committee to make sure that “a proper due diligence process has been followed” rather than exercising direct due diligence. They suggest that the committee can do this by making sure that standards are met in these areas:


  1. investment policy

  2. investment thesis

  3. risk

  4. trust

  5. process


“The investment committee is rarely in the best position to evaluate specific investment opportunities,” write Thomas and Corippo, who argue that the investment staff or OCIO partner should perform that function. Nonetheless, they argue, an investment committee does “play a vital role in ensuring that the objectives, constraints and risk tolerance are well defined; the investment strategy was arrived at following a sound process; and the results are monitored relative to clearly defined measures of success.”

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