Solving investment governance challenges in asset and wealth management

Making improvements to investment governance practices can lead to stronger investor protection, enhanced performance, greater market stability and long-term sustainability, and can help asset managers avoid costly fines and reputational damage.

Asset managers face increasingly complex global markets, ESG pressures, regulatory changes, data security and privacy concerns, and the need to embrace agility, diversity and inclusion in decision-making and culture. Innovating and adapting investment governance capabilities to stay ahead of future challenges will be critical for sustainable growth.

Despite the importance of compliance and defendable processes, behaviours that add value will be more important when it comes to good governance in the future. Future investment governance frameworks will require the following key behavioural ingredients:

• clarity of mission
• commitment to mission
• challenge and diversity
• incentives
• leadership, reflexivity and circularity.

• Avoid: excessive investment risk-taking.
  Prioritise: prudent risk management practices, diversified portfolios and rigorous risk assessment frameworks.
• Avoid: delaying ESG integration.
  Prioritise: applying ESG factors across processes, investment risk assessments and business practices.
• Avoid: opaque fee structures.
  Prioritise: simple and transparent fee structures and disclosures.
• Avoid: a focus on short-term investment returns.
  Prioritise: a disciplined approach to creating long-term, sustainable value.
• Avoid: establishing teams and decision making bodies that lack cognitive diversity.
  Prioritise: diversity and inclusion to drive innovation and decision-making.
• Avoid: resisting new technologies in favour of legacy systems.
  Prioritise: technological advancements that create efficiencies and a competitive advantage.

Common investment governance challenges for large institutional asset owners include:

• organisational culture
• proper oversight of internal asset management
• focus on a collective outcome
• unlisted asset valuations
• accountability for outcomes.

Although many of the principles of good investment governance apply to asset managers of all sizes, key lessons for smaller asset managers include:

• establishing and communicating clear beliefs and goals in relation to ESG and responsible investment
• showing transparency and accountability through meticulous record-keeping and communication to foster trust amid growing public and stakeholder scrutiny
• delivering more focused reporting and concentrating on key decisions in board meetings, to avoid information overload
• achieving board diversity and maintaining board members’ skills to keep up with the evolving investment governance landscape
• managing resources by using technology and research tools for due diligence and to monitor performance and market trends.

Internationally, asset owners are evolving their investment models by shifting from outsourced to hybrid or internalised models. This evolution requires an uplift in investment governance frameworks and presents challenges including ensuring appropriate oversight of internal teams and external providers, and regulator engagement.