Building Investment Teams for Long-Term Success

Smith Hills Building Investment Teams

There is no fixed formula for structuring an investment team but a common negative is allowing organic growth, rather than formally planning for the future. Even when the company has a strategy for structured growth it may not filter through to their investment teams. The importance of building for growth is in the detail.

For example, many organisations go through the motions of an annual appraisal to discuss staff performance. This may meet standard procedural objectives for whatever comparative analyses may be run but how many companies use this opportunity effectively?

When key staff members leave an organisation, their reasons are often the same and are generally avoidable. Generally accepted theories of motivation seem to reveal that where fund managers are well rewarded, money is clearly not the reason for their decisions.

Often, there is an acrimonious parting with blame on both sides as a failing relationship has been allowed to break down between the investment manager and the senior manager. At this point, it is unlikely that the situation can be turned around. Prior to this, though, there is an opportunity for the management to identify and improve circumstances within their teams.

Properly structuring an investment team can be critical to long term success. Here are some reasons why:

• Investment decisions made by clients today are a direct result of impressions formed and compounded over time. It is unrealistic to consider that years of certain behaviours or reputation can be changed within a few weeks, therefore to attempt successful growth against the odds is sure to result in failure. Strategically planning for growth, identifying possible issues and resolutions, has the potential to succeed.

• Investment teams can feel remote from the rest of the business and their focus is often mistaken for aloofness, with the rest of the company seeing them as ‘elitist’. Failing to engage any group in the business leads to resentment. Communication voids need to be bridged – and strategic planning with investment team is an effective bridge – demonstrating how each department is integral to the business with a planned strategy of company growth.

• Central marketing and distribution services are often concentrated on the core business, essentially ignoring niche areas, such as investment teams. They then perceive that the company’s marketing and sales teams do not fully understand their requirements and the business is not supporting them. When this happens, individual departments embark upon their own sales and marketing tasks, driving a wedge further between themselves and the rest of the business, both internally and externally.

• When creating commerciality in the investment team, be aware of performance and rewards. Whilst aligning rewards to outcomes under AIFMD may be a key strategy, there is a risk of creating imbalance and disharmony within a profit and loss based investment team. Individuals are not always money-motivated, some may hold higher values, therefore remuneration planning is critical to optimise correct behaviours with desired outcomes.

Elements to consider including within the Investment Team formal plan (note that companies’ strategies will differ but your plan should be based on thoughtful collaboration):

• Each investment team should be able to articulate a very clear investment objective and process. This is a value proposition and in it the team should have sound (academic) reasoning the approach works.

• The business should be able to map each team the optimal and honest routes to market (now and in the future) – be that domestic, offshore, institutional ore retail, ETF etc.

• Understanding perceptions of strength and weakness, articulation or approach, product features is likely the most critical.

• Rigorous analytical review, similar to that which a sophisticated investor would undertake. This allows all process statements that are made to be tested, ensuring perception and reality meet.

• Team planning – individual and team development and succession.

• Financial modelling of team profitability and cost base to ensure transparency for the investment team, which can be crucial in remuneration expectations.

• Finally a set of goals and achievable targets ahead of the next business plan review.

Highlighting potential issues as early as possible provides opportunities to address them, to improve the performance and profitability of the business over the medium term whilst ensuring a solid structure for the longer term.

The process is to examine tangible outcomes and determine cross company engagement, therefore budget costs and benefits should be shared (e.g. consultancy, modelling, etc.) to ensure effective participation by all departments and align financial interest equally throughout the business.

Putting the theory into practice for the first time will be time consuming but wealth and asset management investment teams that make multi-million pound investments will reap higher rewards and that should be the compelling justification to invest in building teams for long term success.