Practical analysis for investment professionals
20 September 2019

Investment Governance for Fiduciaries: The How and the Why

Michael E. Drew, PhD, and Adam N. Walk, PhD, are the authors of Investment Governance for Fiduciaries, published by the CFA Institute Research Foundation.

How do we as fiduciaries approach investment governance?

That question is more important than ever.

Why? Because increased scrutiny around investment governance, fiduciary duty, and the performance of institutional investors — pension plans, endowments, and foundations, among them — coupled with ongoing regulatory supervision demands that we demonstrate best practice in a transparent and defensible manner. 

This means that how we do things is just as important as what we do.

Subscribe Button

Investment Governance for Fiduciaries, our new CFA Institute Research Foundation monograph, begins by asking this initial “how” question.

We need to embrace the human dimension and define investment governance not just for fiduciaries, but for everyone in the investment organization, regardless of their specific function, skillset, and experience.

Investment governance is both directional and relational: It is about policy and process as well as trust and culture.

It is more than tweaking investment policy statements, ticking another box in a compliance checklist, or being dazzled by an investment manager’s PowerPoint wizardry during the beauty contest/manager-selection process.

Great investment governance is more than compliance. When investment governance is about compliance alone, it limits the scope of our deliberations. We only ask, Are we doing things right? Great investment governance goes deeper: It asks the harder questions, such as, Are we doing the right things?

That means going beyond Sharpe ratios, Jensen’s alphas, or models of manager skill. To explore both the human and the qualitative dimension, we must find a common vocabulary and framework to meet the challenge.

Investment governance is about values, about achieving great outcomes for those we serve. Fiduciaries must bring coherence to their investment governance practice. And that requires mission clarity: We need to tackle the “why” question!

Financial Analysts Journal Ad

As “purpose-driven” fiduciaries, we need clear investment beliefs to inform the “how.” These beliefs are our metaphorical North Star that guides the investment process we create to solve the beneficiary’s investment problem.

Around the world, fiduciaries are struggling with the challenging investment outlook. Cash rates are low, inflation is low, and discount rates are compressed.

In the late 1980s, an expected return of 7.5% could be generated with just cash and bonds. Today, to achieve the same expected return, a fiduciary may have to hold 90% growth assets, a third of which would be alternatives. That is, the same expected return and a six-fold increase in expected volatility.

This has placed much greater demands on investment governance. Monitoring a multi-asset process with private market exposure requires much more from fiduciaries than a portfolio of cash and bonds. Has your internal resourcing of the investment governance process — the “governance budget” — kept pace with these radical changes in portfolio composition over the past three decades?


The investment governance process must protect the beneficiary, to the greatest extent possible, from all the potential mishaps of the investment industry. We call this ongoing fiduciary process OPERIS: Objective; Policy; Execute and Resource; Implement; and Superintend. This framework puts the beneficiary first and ensures role clarity by defining a fiduciary line.

OPERIS constructs a metaphorical fortress that facilitates the selection of the next great asset class or investment manager, but it also places as much or more weight on avoiding poor investment decisions. We see this defensive mindset as a sustainable, comparative advantage available to the fiduciary investor. Our central thesis is that achieving outcomes for beneficiaries is as much, if not more, about managing risks in the broadest sense as it is about harvesting returns.

This requires that the fiduciary defines the mission — the why. That means asking, What’s our objective? This requires a holistic understanding of the beneficiary’s investment problem. Too often, fiduciary boards’ answer to this question is, “Our primary objective is to outperform our peers.”

This is not the right answer.

Inputs to the Outcome

Great investment governance approaches investment returns as inputs to the outcome, not the outcome itself. In the context of a defined-contribution (DC) plan, for example, a beneficiary may measure success by, say, replacing two thirds of their pre-retirement income in real terms over the retirement phase. In this instance, the fiduciary needs a dual monitoring approach that includes both the traditional performance evaluation of their investment managers as well as understanding, on a periodic basis, the probability that the objective won’t be met.

We believe the prevailing approach to monitoring and review only addresses a subset of the questions facing the modern fiduciary. The fiduciary’s role is to ensure the investment organization and the beneficiary’s actual problem are in alignment. This means orienting and applying resources — people, policies, processes, and systems — to address the underlying investment challenge. It’s about creating collaborative cultures and securing accountability both internally and with external service providers.

It’s about building a fit-for-purpose investment governance capability for our task, in our context.

Ad for Earning Investors' Trust Report

In a world where the consensus expectations for forward-looking returns are muted, fiduciaries need to exploit every advantage on behalf of those we serve. We cannot delegate accountability. And as history has shown, any fortress — military or metaphorical — is only as strong as its most vulnerable point.

Fiduciaries are the stewards of “other people’s money.” That money may be the retirement savings of millions of workers, the wealth of nations, or the legacy and good works of a charity.

Great investment governance provides a defensible, repeatable, and documented process that places our beneficiary at the heart of all we do.

For more from the authors on this subject, check out their recently published monograph Investment Governance for Fiduciaries.

If you liked this post, don’t forget to subscribe to the Enterprising Investor.

All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

Image credit: ©Getty Images/ marina_karkalicheva

About the Author(s)
Michael E. Drew, PhD

Michael E. Drew, PhD, is managing partner of Stonechat Capital; a director of Drew, Walk & Co.; and a professor of finance at Griffith University. He is a financial economist specializing in the areas of investment governance, pension plan design, and outcome-oriented investing. Drew’s research has been published in leading practitioner journals, including the Journal of Pension Economics and Finance, the Journal of Portfolio Management, and the Journal of Retirement. He has been invited to make submissions and to testify before numerous committees, including the US Department of Labor and the SEC joint hearing on target-date funds. Drew serves as a specialist member of the QSuper Investment Committee and is a member of the Investment Advisory Board of the Petroleum Fund of Timor-Leste (East Timor). He received his PhD in economics from the University of Queensland, is an Accredited Investment Fiduciary Analyst®, and is a Life Member of FINSIA, the Financial Services Institute of Australasia.

Adam N. Walk, PhD

Adam N. Walk, PhD, is a partner of Stonechat Capital; a director of Drew, Walk & Co.; and an adjunct professor at the University of Notre Dame– Australia. He is a financial economist specializing in the areas of investment governance, pension finance, and investments. Walk’s research has been published in the Journal of Portfolio Management and the Journal of Retirement. He serves as an alternate director of Rest and adviser to the Group Capital and Investment Committee at RACQ Group, is a board member of the Archdiocesan Development Fund of the Roman Catholic Archdiocese of Brisbane, and is deputy chair and a trustee of Campion College Australia. Walk received his PhD in financial economics from Griffith University, Queensland, Australia. He is an Accredited Investment Fiduciary Analyst® and a Certified Investment Management Analyst® designee.

1 thought on “Investment Governance for Fiduciaries: The How and the Why”

  1. I think the study is very naive in assuming that entities follow CFA Institute Global Investment Performance Standards (GIPS®) Entire asset classes making up 30%+ of plans like hedge funds and private equity refuse to comply with GIPS and fiduciaries look the other way.

Leave a Reply

Your email address will not be published. Required fields are marked *

By continuing to use the site, you agree to the use of cookies. more information

The cookie settings on this website are set to "allow cookies" to give you the best browsing experience possible. If you continue to use this website without changing your cookie settings or you click "Accept" below then you are consenting to this.