This article originally appeared on MorningstarAdvisor.com. Used with permission.

A Software Solution to Investment Policy Statements

It has been a long wait, a very long wait, but IPS AdvisorPro™ is finally here. This Web-based application that creates investment policy statements was developed by two prominent, highly gifted financial planning professionals, Norm Boone and Linda Lubitz.

Boone is founder and principal of Mosaic Financial Partners in San Francisco. He has been cited by numerous periodicals as one of the best financial planners in the country. Boone has served on the National Board of the Financial Planning Association, the TIAA-CREF Institutional Advisory Board, and the advisory council for Schwab Institutional. His articles have appeared in CCH's Journal of Retirement Planning, Journal of Financial Planning, and Wealth Manager.

Lubitz is the founder of the Lubitz Group in Miami. She also serves as managing director of Mosaic Financial Partners East Bay Region. Like Boone, she is regularly cited as one of the best financial planners in the country. She has served on the National Board of the Financial Planning Association, and she is an emeritus member of the TIAA-CREF Institute Advisory Board.

Introduction

IPS AdvisorPro™ only does one thing, but it does it well: It helps advisors craft unique, professional investment policy statements. If you are not familiar with the investment policy statement (IPS), you should be. An IPS is a written document that explains the relationship between an investment advisor and a client. It should include, among other things, the client's goals, the investment procedures that will be followed by the advisor, the responsibilities of the client, and the responsibilities of the investment professional. An IPS is not a contract; it is more like a blueprint that will govern the behavior of the investor and the advisor, with regard to one or more investment portfolios.

Two versions of the software are available: Professional has an annual license fee of $495; Standard's annual license fee is $395. A licensee can create 100 new investment policy statements per year and maintain an unlimited number of them. If you create more than 100 new statements within a year, an additional charge applies. For large firms, institutional pricing is available.

IPS AdvisorPro™ is the second iteration of the Boone/Lubitz investment policy statement product. The first one, The Investment Policy Statement Guidebook, was distributed by Ibbotson Associates, which was recently acquired by Morningstar.

The first product was essentially a Microsoft Word template with specialized tools and macros built in. It was effective and fairly priced. I it in my own practice. The only problem was that when Microsoft patched, upgraded, or otherwise altered Word, it sometimes caused problems with the operation of the IPS template. By going to the Web with this latest version, Boone and Lubitz allow users to sidestep the update issue because the developer can take care of any upgrading and patching behind the scenes.


Account Setup Wizard

Before you can use the software, you have to set it up, and a wizard is provided to help you along the way. If you expect to pay your money, push a few buttons, and immediately start cranking out perfect investment policy statements, you will be disappointed. IPS AdvisorPro™ will probably require at least a few hours of your time before you create your first investment policy statement for a client, but it is worth it in the long run.

The reason the setup takes so long is that as you work your way through the process, you are actually creating your own IPS templates that you will later use to produce documents for your clients. Let me repeat that: The wizard helps the user to create customized templates, not individual documents. Once the templates are customized, they are used to create the actual documents.

Why can't the developers do that for you? There are two reasons. The first is that different elements may be required depending on who the client is. For example, if you only deal with individuals and families, you would use one type of IPS. If you are dealing with a 401(k) plan, the requirements and the language of the typical IPS will be different.

The second reason you have to do this yourself is that you will want to customize each template to some extent. Do you want to include every clause that the program suggests? If so, do you like the language of each? When you or your colleagues are creating a document, do you want some clauses to be mandatory and some optional? Do you want to allow colleagues to edit the clauses? These are the kinds of decisions you make when using the account setup wizard.

The setup is a three-step process. First, you edit the templates. Next, identify the asset classes your firm employs. Third, create your asset-allocation models. The software provides default templates, asset classes, and asset-allocation models, but you can modify them or add your own.

Step 1: Templates

Boone and Lubitz have identified eight distinct IPS types: individual/family, family trust, 401(k), profit sharing plan, pension plan, charitable trust, insurance trust, and college endowment fund.

If you only deal with individuals and families, you may only have to create one template; however, if you deal with all of the different client types listed above, or if you want to be ready to deal with them should the opportunity present itself, you may need to create as many as eight IPS templates.

Unless you are in a great rush, I advised you to select all types, because you can only run this setup wizard once. There is a way to make adjustments later, but it is not as convenient as using the wizard. In addition, if a section or clause is common to all of the templates, you can enter it once in the wizard, and it will be applied to all eight template documents.

The wizard also allows you to insert placeholders. Let's say that I want to insert a field for my firm's name on the cover page of the insurance template. I open that template editor, place the cursor where I want the company name to go, select Insert Placeholder, and check the box next to COMPANYNAME (there is a description next to each placeholder that explains what it is in simple English), and then click Okay. The placeholder appears in the template.

When working within the page editor, there are two extremely useful hot links. The first is a Revert to Original Text link. Once I saw this link, I felt empowered to experiment because I knew that any dopey mistakes I made could be eradicated in a heartbeat. The other useful hotlink is Show Original IPS AdvisorPro™ Provided Text. When you click here, an additional window opens that displays what the original page looked like before I started messing it up. I can use it as a guide to further modify my work, or I can cut and paste from the original into my modified version.

Step 2: Asset Classes

Once the templates have been edited, it is time to move on to the asset classes. If you are comfortable limiting yourself to the roughly 30 asset classes listed here, or a subset of these, and approve of their statistics (returns and standard deviation), you can move on. If not, you can add your own asset classes or modify the statistics, but if you do, the information will no longer be updated automatically by the developers. Updating becomes your responsibility.

Step 3: Asset Allocation

Next, you can create model asset allocations. You can restrict yourself to the six default asset mixes, or you can create as many new ones as you desire. If you create new models, and they include custom asset classes, the advisor is responsible for supplying the risk/return statistics for the resulting portfolios.

Once you have entered all of the information, the wizard takes you to the screens that allow you to create a new IPS. Creating an IPS is as easy as can be. A questionnaire takes you through the process. If you do not complete the work in one sitting, you can save the IPS and come back to it later for completion. You can then print a copy for the client to sign.

What's Hot

I've been eagerly awaiting the release of IPS AdvisorPro™ piqued for a number of reasons. The first is that I know many advisors who have used previous versions of this product, and they generally held it in high regard. Most have been waiting to see if this long-awaited update meets expectations. For the most part, it does.

The program was created by two veteran advisors who are widely acknowledged as experts in this field. The design is well thought out. User screens and output are clear and professional looking. Once the set up has been completed, IPS AdvisorPro™ is quick and easy to use.

The program is highly customizable. Senior members of the firm can customize the eight templates. In addition, they can control how much, or how little, others in the firm will be allowed to modify the templates for individual clients. This ensures that all investment policy statements created by a firm are consistent, and that all advisors follow policies that are in line with the firm's philosophy and constraints.

Since IPS AdvisorPro™ is a Web-based product, there are no upgrades to install, since the provider does it all for you. While you can download and save a PDF of all documents you create, all of the data reside on the secure IPS AdvisorPro™ servers, providing the licensee with a redundant, off-site repository of all pertinent client information.

What's Not

Almost all of the hassles you are likely to encounter will be during the setup process. If you can make it through there, you are home free.

The setup is time consuming, and it can become cumbersome. The developers recommend that you first print the 24-page "Guide to Getting Through the IPS AdvisorPro™ Account Setup Wizard." They also suggest that you print a copy of each of the eight default IPS templates, most of which exceed 20 pages. The idea is that you can annotate the guide and mark up the printed versions of the templates, which can then be used as a workbook for the setup wizard.

To the extent that you can live with the layout, language, asset classes, and model portfolios provided, your task will be that much easier. Changing a phrase, removing a paragraph, and other simple edits are not beyond the ability or the patience of the average user, but if you feel the need to do extensive editing of the templates, you may become frustrated.

The same goes for asset classes and model portfolios. If you use the model portfolios provided, setup will be easy. Even if you construct your own models, odds are you will still be highly satisfied, provided you don't stray from the default asset classes. If you create many customized portfolios using many customized asset classes, you lose the benefit of outsourcing the maintenance of the risk/return statistics. This is not a fatal flaw, but it does add one more regular task to your to-do list. I'd avoid it if possible.

Compliance Conundrum?

While a detailed investment policy statement can be an excellent practice management and client retention tool, using one is not without risks. To assess those risks, I talked to a couple of the nation's top compliance gurus, Thomas D. Giachetti, chair of the Securities Compliance & Arbitration group at Stark & Stark, and Barry P. Schwartz, founder and partner at Advisor Compliance Associates.

Schwartz says, "The investment policy statement should be a guiding document, but some advisors mistakenly use it to memorialize their specific recommendations. This can be problematic because specific recommendations change over time." If advisors are not careful, they can find themselves in a Catch-22 situation. "Best practices dictate that your firm use an investment policy statement," Schwartz says. "The more specific it is, however, the more often it must be referenced and updated. In addition, if you customize an IPS for each client, regulators will want be know if you have the systems in place to carry out your mandate."

Giachetti concurs: "Investment policy statements should be short and sweet. When it comes to IPS, I fall into the KISS (keep it simple stupid) camp." Giachetti added that he is wary of software solutions because he is not a believer in "one size fits all." When I explained that IPS AdvisorPro™ is highly customizable, he endorsed that flexibility, but nevertheless warned that a professional should be the one doing the customizing. "There are many critical elements to an IPS," Giachetti says. "These include appropriate disclosure language and appropriate client acknowledgements. It is essential that the document put the onus on the client to inform the advisor of any changes in client circumstances." Giachetti further recommends that advisors follow up with a letter to clients each year, reminding them of their responsibility to inform the advisor of any changes in their situation.

What do these compliance insights mean to advisors who use this product? First, extraordinary care must be used in creating the templates. Second, a compliance expert should review any IPS before it is used with clients. Third, the job doesn't end with the creation of an IPS. It must be referenced and maintained regularly. Four, the more detailed the statements are with regard to investment process, the more technology may be required to carry out the mandates contained within the IPS documents.

Should You Buy?

The answer is a qualified "yes." Best practices include the use of an IPS. There are many programs out there that claim to produce one, but none targeted at the advisor market is as comprehensive as this one. IPS AdvisorPro™ is not just comprehensive; it is well designed, highly customizable, easy to use, and fairly priced.

The only reason I qualify my recommendation is that I fear some advisors will misuse it. If they just blindly follow all of the default language, if they fail to get the proper guidance when preparing the templates, if they fail to invest the necessary time at the beginning, there is a good chance that there will be problems down the road. If they do not review and update the IPS regularly, they are better off doing nothing. Finally, if they create a custom IPS for each client, but do not have the systems in place to follow through on the IPS, they are setting themselves up for failure

If used properly, IPS AdvisorPro™ can be a wonderful tool. Just make sure you give it the time and the respect it deserves.

Joel Bruckenstein, CFP, is co-author of the book Virtual Office Tools for the High-Margin Practice.