IPS AdvisorPro® Blog
The quote below is from a recent article in On Wall Street titled How To Help Clients Cope With Volatility(Charles Paikert, October 20, 2014).
‘Don’t relegate the investment policy statement to a hum-drum formality; make it a centerpiece of your relationship with your client, say veteran wealth managers.’
Please click here to read the full article.
Linda Lubitz Boone, CFP®, and co-founder of IPS AdvisorPro®, recently presented a webinar for fi360. The webinar, titled Managing Client Expectations Using an Investment Policy Statement, was recorded. To learn more, and access the recording, please click here.
You already understand that having an investment policy statement is good for you and your clients and, generally speaking, know what the IPS is supposed to do. But do you sometimes struggle deciding what, exactly, you should be putting into your client IPSs?
At its core, an IPS is a document that reflects what a client and advisor have agreed to regarding how the money is to be managed. To consider what should go into an IPS, imagine what you and your client need to know about what the other is doing. Those are the topics that need to be documented. A good IPS should help each party clearly understand the other’s expectations and should therefore help to avoid surprises.
WHAT YOUR CLIENT NEEDS TO KNOW ABOUT THE INVESTMENTS
Put yourself into your client’s shoes. What would you want to be sure you understood about what the advisor is doing? What might you be surprised to learn about how the investments are being managed?
Are we investing in individual securities or in mutual funds?
Is the advisor going to be making every decision, or will someone else (e.g. a separate account manager) be involved?
Will you be timing the market, or sticking to your “guns” when the markets are changing?
What allocation will my portfolio reflect? On what basis are you making that decision?
Will you notify me before you make trades? When you change my allocation?
How much money will I be generating from my investments and how will it come to me?
Will you vote my proxy statements for me?
Do I have any responsibilities as the client to make this relationship work?
How often will we meet?
How will I get information about my investments? What format will that take?
WHAT YOU NEED TO KNOW ABOUT YOUR CLIENT
From your perspective, the IPS needs to include critical information about the client and the client’s preferences. That information also needs to be updated as the client’s circumstances evolve or change. For example:
How much money do you want from this portfolio and how often?
How aggressive are you willing to be in your investments?
What other assets or liabilities do you have that should be taken into consideration as we design your portfolio?
Will more money be coming into this portfolio? If so, what’s that look like?
Is there anything in particular that you want to include or exclude in your investments?
Do you want exposure to investments that are guided by socially responsible considerations?
What is your tax situation? Should that be a consideration in making investment decisions?
AN OUTLINE FOR THE IPS
More than anything else, the IPS is a communications tool, helping both the client and the adviser be sure they are clearly understanding the other’s desires and expectations. The IPS can (and, in our opinion, should) include the following sections:
- Opening positioning on what an IPS is and why it is important to this relationship
- Descriptive information about the client–ID, circumstances, and general outlook
- Investment objectives–what is needed from the portfolio
- Time horizon
- Tax considerations
- Risk tolerance
- Asset allocation
- Portfolio holdings (and exclusions)
- Specific client requests
- Investment management procedures to be followed
- Obligations and responsibilities of the party
- Meetings and investment reports
- Procedures for modifying the IPS
- Signatures and acceptance
Posted by Norm Boone, MBA, CFP®, (reprinted from fi360 blog, September 29, 2014)
Having a written investment policy statement just makes it easier for my clients to sue you. You’ve probably heard that argument before, right? But that’s only true if you are either unwilling or unable to follow what’s in the IPS. And that should never happen.
An IPS is a written agreement between you and your client about how the client’s money is to be managed. In most cases, you (the advisor) are the one who writes the IPS, with the client’s input. In cases where you are not directly involved in drafting the IPS, it is imperative that you read and agree to the existing document before accepting an engagement. If something is in the document that you don’t agree with or may not be able to deliver upon, don’t agree to it. Both you and the client should sign the finished IPS, indicating that you each agree with it and accept it.
ONLY INCLUDE WHAT IS TRUE
If you are writing the IPS document, it should exactly reflect your procedures and philosophies. These are things that you probably do consistently for all your clients. If something changes about your processes or how you manage money, then you have an obligation to explain those changes to clients before you actually make the switch. As part of that process, you should get an additional client signature, indicating their understanding and acceptance of the change. If clients don’t agree, it’s better to learn that up front than after the fact.
Furthermore, you should never include in your IPS statements that which you a) know you won’t actually do or b) aren’t sure you will do. There is no requirement that any particular bit of information needs to be in an IPS. If you can’t be sure you will be doing exactly what the IPS is committing you to do, then you should not include it in your IPS.
If you only have in your IPS those things that you are prepared to do and you actually do them, then the IPS should never be grounds for a lawsuit. In fact, it should help protect you by being a mutually agreed upon game plan for the investment policy.
WHAT TO DO WHEN CLIENTS WANT TO GO OFF SCRIPT
Having client requests documented in a signed IPS is another way it helps protect the advisor. Let’s say that a client wants to exclude potentially important parts of a well designed portfolio (e.g., implementing small stocks or short-term bonds), or perhaps he wants to include elements that could be harmful, like having 50% of the portfolio in his employer’s stock. If advising against the request isn’t enough, having that request documented in a signed IPS will mean that the client can’t later blame the advisor for doing what the client himself had insisted, as documented in the IPS. The IPS serves as institutional memory that helps avoid that occasional problem.
If you do what the IPS said you were going to do (and that should always be the case), and the client has signed off already accepting that approach, then it would be a highly unusual situation for a court to even entertain a client complaint about an adviser doing something the client had already agreed to.
If you don’t do what you say you will do, then perhaps you ought to be sued. But, if you carefully follow your own procedures and have explained those processes to your client, having all that documented will only help you.
Posted by Norm Boone, MBA, CFP® (reprinted from the fi360 blog, September 15, 2014)
In Gil Weinreich’s recent ThinkAdvisor article (7 Ways to Avoid Picking a Bad Advisor, September 15, 2014), a Wall Street Journal editor’s negative experience with a financial advisor is discussed. A highlight of this article stresses the significance of an Investment Policy Statement (IPS) in the Advisor-Client relationship. Please click here to read this article.
On June 18, 2014, IPS AdvisorPro® (Investment Policy Statement Software) and FinaMetrica (Risk Profiling System) hosted a webinar focused on the integration capability available to users of both applications. Please CLICK HERE to listen and view a replay of this webinar.
The capital market data used to calculate model portfolio returns in IPS AdvisorPro has been updated. In addition to the typical data changes that occur from year to year, there are two new changes to the data you should be aware of. First, the returns have changed from a Geometric return to an Arithmetic return. Second, the data precision has changed from two decimal places of precision to one decimal place of precision.
Geometric versus Arithmetic Returns
Which return measure, arithmetic or geometric, is appropriate as a basis for defining risk and return for portfolio optimization? A paper written by Richard Michaud of New Frontier Advisors (Michaud, R. 2003. “A Practical Framework for Portfolio Choice.” Journal of Investment Management, 2nd Quarter.), shows the geometric mean is a function of the length of the investment horizon as well as the return distribution. In contrast, the arithmetic mean is a measure of centrality that does not depend on the investment horizon. The arithmetic mean is the measure of choice for portfolio optimization. From a practical point of view, the geometric mean typically underestimates investment return and may lead to unrealistic risk-averse investment decisions.
New Frontier Advisors also recommends using “less” precision when reviewing risk and return data. While this may seem counterintuitive, more precision promotes excessive confidence in the data as it is being examined by the advisor and the client. Extra precision also promotes excessive change to constantly evaluate differences between the optimal model and the client’s current portfolio. Portfolio optimization is not an exact science, and the data should reflect this notion.
We are pleased to announce that our IPS AdvisorPro® technology is now integrated with the FinaMetrica risk profiling system. Users who subscribe to both technologies can now import their clients’ risk profile reports directly from the FinaMetrica system into investment policy statements generated using IPS AdvisorPro.
This collaboration streamlines users’ ability to assess a client’s risk tolerance and incorporate those results into the investment policy statement, helping to better set context and expectations for the management of investment decisions. Used together, the technologies help facilitate advisor-client communications, mutual understanding of roles and responsibilities, and overall more successful client and investment management practices.
For more information on the integration, please contact IPS AdvisorPro subscriber support at support@IPSAdvisorPro.com.
FinaMetrica specializes in risk tolerance and risk-related matters. The FinaMetrica risk profiling system is based on a psychometric test of personal financial risk tolerance. Psychometrics, a blend of psychology and statistics, is the scientific discipline for testing attributes such as risk tolerance. Launched in 1998, the system is now used by 3,500 advisers in 23 countries in seven languages. More than 650,000 profiles have been completed. The FinaMetrica system enables advisers to make valid and reliable assessments of their clients’ risk tolerance, incorporate those assessments into the financial planning process and explain risk more meaningfully. For more information, visit www.riskprofiling.com.
Read the press release.
Click here to view a brief video of this integration.
Please click here to watch Bill Winterberg’s FPPads Bits and Bytes regarding IPS AdvisorPro®’s acquisition by fi360.