Why Committees Shouldn't Make Investment Decisions

Investing by committee is dangerous. Here's an analogy to illustrate my point: your company car has 85,000 miles on it and it’s time to choose a new one. You are pretty careful about the company’s money, but you also enjoy a new car every few years, and picking it out is half the fun.

But your company has a new policy. To engage with the customers, home office has declared that all new cars must be chosen by a group of your best customers. That group has been selected by your boss and includes a grocery store manager, a local banker, the Ford dealer and an art instructor from the neighborhood community college. There’s also a business reporter from the daily newspaper.

Chances are good that everyone in this group has purchased a car before. In fact, you glance around the parking lot a few minutes before the first car selection committee meeting begins. Members arrived in a battered pick-up truck, a brand-new Ford, a late model import and a Honda motorcycle. This ought to be really interesting!

Well, you get the point. No matter how well-intentioned this group, it’s unlikely you will end up with exactly what you want. And there’s a fair chance you’ll get something powerfully different than what you want! Truthfully, you might be driving anything from a green hybrid SUV to a Greyhound bus by this time next month.

Investing by committee is similarly dangerous. Committee members often have personal investment experience, and many of them work someplace in the finance world. They certainly have good intentions, but that’s not always enough to make good choices. In fact, many of those characteristics actually cloud good judgment.

In choosing an investment advisor, you should seek safety, competence, convenience and value. Portfolio composition should be a function of both monetary purpose and legal guidelines, per the Uniform Prudent Investor Act. All these things are verifiable and the matrix for evaluating these issues isn’t burdensome or obscure.

The Pitfalls of Investing by Committee

Unfortunately, that’s not how committees truly work. Any committee process is a complex web of psychology, sociology, power and false illusions. There are always conflicts of interest, both subtle and not. And there’s a mish-mash of both personal and institutional risk tolerances. What could go wrong?

Nearly everything, actually. Especially volunteers without specific institutional portfolio expertise or history. Instead of focusing on fiduciary duties or specific legal guidance, or even the advice from a reputable consultant, they choose heuristics (shortcuts) to make the job easier. It becomes a popularity contest of sizzle, flattery, community influence and ill-perceived values. And the investment managers vying for attention know all this. The sales process carefully embraces every group weakness. 

So, it’s not surprising when board members behave that way. It still bothers me, though. The fiduciary standard for nonprofit board members should weigh quality investment processes much higher than non-investment factors. Investing isn’t a commodity product, especially with large portfolios, but still, the worst reasons often win. (For more from this author, see: Why You Should Hate Relationship Marketing.)

When I was a young person, I listened to my friend explain why he was angry about his experience in a basketball league. My friend was a talented player and practiced hard all the time. He did what the coach demanded and earned his coveted spot on the roster. Day in and day out, he was a quality basketball player. But it still irked him that another guy on the bench displayed far less talent and gave half-hearted effort at practices and games. That guy cost the team wins.

“I don’t get it,” I said. “How’d he get on the team?”

“Easy,” my friend explained. “His daddy bought the uniforms.”

Don't let your investments be determined by committee members who are only there because their daddies bought the uniforms.

(For more from this author, see: How Cutting Fees Boosts Returns for Nonprofits.)