Banks In Wealth Management – Is Now The Time?

Charles Paikert

Editor in New York – Family Wealth Report

The proverbial window of opportunity for bankers who want to be in the wealth management business has never been wider.

And bankers can’t say they haven’t been alerted: the seize-the-moment theme was repeated throughout last week’s American Bankers Association’s annual Wealth Management and Trust Conference in Phoenix, both from the podium and on the exhibit floor.

In fact, the conference began with the keynote speaker exhorting bankers to “switch to offense this year.” 

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“A lot of consumers are disenfranchised, and there is a big wide-open door right now,” said Charles “Chip” Roame, managing principal for San Francisco-based Tiburon Strategic Advisors. “This is as good as it gets for client acquisition.”

“This is a phenomenal opportunity for local banks to bring in new business that they haven’t had before,” agreed Richard Aguiar, director of business development for the community and local bank market for outsourcing giant SEI.

Advantages for banks

What do banks, especially local and community banks, have going for them right now?

“We’re a part of the community and a known quantity,” said James Szewc, vice president and senior trust officer for First Keystone National Bank in Berwick, Pa. “We are very well positioned for wealth transfers.”

“Banks really do have trusted relationships, especially local banks,” said Mr. Aguiar. “They haven’t changed their stripes, and that is reassuring.”

And in the wake of the financial crisis, banks that didn’t get into trouble have emerged with enhanced reputations.

“Their biggest advantage is their perceived stability,” said Jeff Davis, a Nashville-based banking analyst for Guggenheim Partners. “That counts for a lot in a time of economic insecurity.”

Banks also have an advantage as fiduciaries, maintained  Dave Coffaro, chief fiduciary officer and head of trust and fiduciary services for Wells Fargo Wealth Management.

Emphasizing fiduciary values of prudence, loyalty and risk management were the keys to  leveraging bankers’  potential competitive advantage to get more wealth management business, Mr. Coffaro told the ABA Conference attendees.

“The opportunity has never been greater than it is right now,” he said.

Nor should a banks’ existing customer base be overlooked, said industry veteran Craig Madsen.

“Banks still have a lot of clients,” said Mr. Madsen, who was a senior vice president and managing director at Union Bank in Los Angeles before becoming a consultant in January. “And it’s easier to sell a second product than a first.”

Banks’ ability to lend is also seen as a lynchpin of future success.

“When the economy comes back, they will have the ability to lend and others can’t,” said Linda Lubitz Boone, a wealth manager who also sells investment policy software to banks as co-founder of IPS Advisor Pro. “That’s their big ace in the hole.”

“It’s harder to lend now,” said Mr. Davis, “but when it returns, this is where the money is going to be made.”

Headwinds for banks

And what kind of headwinds are banks facing?

One of their biggest challenges is the lack of a sales culture and a willingness to pay market rates for top wealth management talent, say industry observers.

“Bankers’ biggest problem in wealth management is competing against RIAs who are more aggressive,” said banking analyst Gerard Cassidy, managing director for equity research for RBC Capital Markets. “Until they incentivize people more it will be tough for them.”

“Talent follows money,” agreed Mr. Davis. “The question is whether the banks will pay up.”

Bankers at the conference confirmed that talent acquisition was a big problem for them.

“It’s very tough because you have to pay asset managers so much money,” one banker complained during a question-and-answer session. “We wanted to hire someone, but  their salary would have been second only to the CEO.”

More regulations and compliance also worry bankers.

“We’re going to have more and they take up quite a bit of time and resources,” said Mr. Szewc. “It will be very challenging.”

Bankers are also hampered by offering a narrower range of products, according to industry observers.

“Bankers don’t have enough flexibility,” said Ms Lubitz Boone. “Wealth clients want creative solutions, and bankers can’t offer products like managed futures. They’re still just offering plain vanilla.”

In his keynote speech, Mr. Roame urged bankers to offer different types of investment products, such as low cost index funds, guaranteed income products and “hedge fund-like products.”

Time is right for acquisitions

What else do bankers need to do to capture wealth management business?

Think about acquiring an RIA firm or a team of advisors, say industry observers.

“You should switch your talent focus to acquisition,” said Mr. Roame. “There are tons of firms for sale, and they come with clients and assets.”

“As the market recovers, there will be great buying opportunities,” according to investment banker, Dan Seivert, chief executive and managing partner for Echelon Partners .

The recent dislocation in the markets has produced “the biggest bumper crop of [available] talent this industry has ever seen”, Mr. Seivert told conference attendees.

Bankers who do buy or partner with an existing wealth management firm need to be cautious about the cultural differences in the firms, he warned.

“The key to successfully integrating wealth management into banks is the less integration the better,” Mr. Seivert said. “Let them leave their name on the door, let them keep their compensation structure. They’re coming from a very different place.”

Referrals key

Bankers also need to better leverage client referrals, industry executives say.

Noting that referrals consistently account for over half of new wealth management business, Mr. Roame urged bankers to launch proactive programs for asking for client referrals.

Bankers agreed.

“We need to exploit bank channels more,” said Mr. Szewc. “We should use existing trust customers for referrals.”

While bankers need to “tell their story better,” said Wells Fargo’s Mr. Coffaro, that doesn’t mean more marketing or advertising.

“The best marketing is the people in this room,” he said, referring to the bankers at the conference. “They know the story and need to tell it convincingly to anyone who will benefit.”

Trusts also need to be better leveraged by bankers who want more wealth management business, Chris Heilmann, managing director and fiduciary solutions executive for U.S. Trust said in his closing remarks at the conference.

“A trust needs to be better positioned as a modern product,” Mr. Heilmann said. “The platform must have relevance.”

“Clients lack awareness of the depth of service around trusts,” he concluded. “We need to be doing a better job talking to clients who need solutions.”

February 1, 2010

Norman Boone has an impeccable resume. Founder and president of Bay Area-based Mosaic Financial Partners, Boone earned his CFP certification in 1984 after an undergraduate degree from Stanford and an MBA from Harvard. He served in the first class of directors elected to the national board of the FPA. And he has been included as one of America’s Best Financial Advisors by the Worth/Robb Report every year since the list’s inception in 1994.

A PDF version of this article can be downloaded  here.

THE IPS EDGE

But it’s not his credentials that set him apart; it’s his flair for innovation. In addition to managing Mosaic, which has offices in San Francisco and Lafayette, Calif. Boone, with spouse Linda Lubitz Boone, founded IPS AdvisorPro, an online software application that helps advisors create customized investment policy statements (IPSs). Lubitz Boone has her own Miami-based advisory practice, which provides Boone with additional ways to serve East Coast clients.

IPS AdvisorPro facilitates two crucial functions for advisors. First, it helps them comply with the law. Second, it enhances and clarifies the mutual understanding between client and advisor. Quips Boone: “Well-crafted investment policy statements help clients avoid surprises and help planners avoid lawsuits.”

Today, IPSs are considered a best practice. “What many busy planners fail to recognize is that these IPSs are legally mandated for virtually all fiduciary relationships, including qualified plans, irrevocable trusts, endowments, charitable trusts and foundations,” Boone says. His own clients include several endowments and corporate retirement plans.

While there is no legislation mandating an IPS for individual clients, Boone notes that, in some districts, the SEC is asking to see the IPS between particular clients and their RIA. He suspects that the IPS will increasingly become a factor in audits of client records.

TAKING IT HOME

Boone’s IPS software has helped him streamline his own practice, limiting liability, providing clarity for clients and simplifying compliance. His firm manages over $335 million for 200 clients with average investable assets of $1.7 million. Mosaic and its staff of 12 are strictly fee-only. The firm charges 1% of the first $2 million in AUM, 0.7% of the next $3 million, 0.5% of the next $5 million and 0.3% on assets above $10 million. The minimum annual fee for clients is $15,000. In addition, new clients pay a first-year planning fee that typically runs anywhere from $8,000 to $20,000, based on projected time requirements and hourly rates.

The first-year client experience is thorough. New clients attend a series of two-hour meetings that cover over a dozen topics. For clients with over $1.5 million in AUM, there are no additional financial planning fees for ongoing planning beyond the first year.

Each client has a unique IPS, and the investment philosophy emphasizes low- cost, well-diversified passive strategies, spiced with a few actively managed funds and alternative investments. In general, Boone prefers ETFs to index funds.

NEW IDEAS

Boone is pushing the envelope in two new areas. He’s seeking to merge with other firms to take advantage of economies of scale, specifically excess capacity in Mosaic’s investment department. The firm also built out its administrative infrastructure, positioning it to manage the business side of a larger combined firm.

Boone’s growth target is $500 million in AUM by 2011 and $1 billion by 2014, either through new client acquisition, new advisor hires or M&As. In the meantime he launched the Mosaic Family Business Center to assist multigenerational family businesses with strategic planning, business succession and leadership training. “We have the privilege of creating more effective methods to help our clients achieve their goals,” he says. “We’re fortunate.”

Jim Grote, CFP, contributes regularly to Financial Planning.

1.    Help render appropriate advice in a post-Black Swan Era
2.    Help advisor regain client confidence
3.    Help advisor rebuild or win new business

Thirteen (13) sessions held during the Practice Management Summit included, but was not limited to, the following:

• Investment Management Consulting in the 21st Century: Craft or Trade? Ron Surz, President, PPCA
• To Be or Not To Be: Fiduciary Landscape Under Regulatory Reform; Kristina Fausti, Director of Legal and Regulatory Affairs, fi360
• Using Public Relations to Turbo-Charge Your Marketing Plan; Marie Swift, President, Impact Communication
• Dynamic Asset Allocation: Rx for a Post-Black Swan Era; Rex Macey, Chief Investment Officer, Wilmington Trust
• Providing A Comfortable Ride for Your Clients (and Your Practice); David Loeper CIMA, Wealthcare Capital
• In Search of Manager Alpha: Does Active Management Still Make Sense? Larry Sinsimer
• The Value Gap: In Search of Advisor Alpha; Steve Barger, Consulting Partner, Advisor Solutions Network
• The Art of Conversation: Your Leading Advantage; Lewis Walker, Founder, Life Transitions Advisors
• Rebuilding Your Business and Managing Client Expectations with Investment Policy Statements; Norm Boone and Linda Lubitz-Boone, IPS AdvisorPro®
• How Personal Legacy Planning can Differentiate Your Practice and Drive Your Production; Mark Colgan, President / Plan Your Legacy
• Audio recordings and speaker presentations are available at www.asn360.com.agenda.asp

Miami, FL and Overland Park, KS – August 26, 2009. VSR Financial Services, Inc. announced today the selection of IPS AdvisorPro^® to provide their over 200 financial advisors with advanced investment planning tools for developing Investment Policy Statements (IPS). 

Click here to download a PDF version of this Press Release.

“The use of IPSs has become more than just a “best practice” in the industry,” said co-founders Norm Boone, MBA, CFP^® and Linda Lubitz-Boone, CFP^®.  “In today’s environment, disclosure and transparency are becoming increasingly important and the IPS becomes the go to document and record of the agreements between advisor and client about how their money will be invested.”

As part of the arrangement, financial advisors affiliated with VSR will have access to preferred pricing, education and training on customizing and using comprehensive IPSs in their practice.

“We’re very excited to be able to enhance our offering to our financial advisors and their clients through the online technology of IPS AdvisorPro®,” said Chatten Scruggs, SVP Technology, of VSR Financial Services, Inc.  “We take a long term, thoughtful approach to providing financial services and the use of IPSs is a critical aspect of that delivery.  We look forward to streamlining that process and making it an easy step for our advisors through IPS AdvisorPro®.”

About VSR Financial Services, Inc.

VSR Financial Services is a full-service securities broker/dealer founded in 1985.  VSR’s focus is on the long-term strategies and products designed to change visions into reality.  By design, VSR is a small firm providing individualized service and support.  VSR is not transaction-oriented and offers no proprietary products.  The highest priority is building and maintaining long-term relationships.  Through a network of more than 250 representatives, VSR represents over 80,000 client accounts throughout North America and has invested annually some $5 billion on their behalf.

About IPS AdvisorPro®

Created by financial advisors for financial advisors, IPS AdvisorPro^® is designed to work with all types of wealth management professionals and their practices.  IPS AdvisorPro^® offers a flexible solution to creating and managing Investment Policy Statements that are easy to use through an encrypted, secure web-based environment.  With over 1,000 users and 17,000 IPSs created, IPS AdvisorPro^® is the industry’s leading technology solution.  IPS AdvisorPro^® was named in 2006 by Morningstar as the “Software of the Year” and was a CPA Wealth Provider “Financial Planning Awards Winner” in 2009.  For more information, please visit www.IPSAdvisorPro.com

For More Information, please contact:

IPS AdvisorPro^®: Linda Groden, 330-724-7145, lindag@ipsadvisorpro.com

VSR Financial Services, Inc.:  Kevin Johannesen, 913-234-8331, kjohannesen@vsrfs.com

By one estimate, it can take the typical financial adviser 155 minutes to create an investment policy statement from scratch using a word-processing program such as Microsoft Word.

To refresh your memory, an IPS is a written document agreed to by both an adviser and client that outlines goals, policies and procedures to be used by the adviser for managing investments.

Such statements are required these days where a fiduciary relationship exists.

The above estimate is by Norm Boone, president of San Francisco-based Mosaic Financial Partners Inc. and co-creator of the popular IPS AdvisorPro® software and online application from BLIPS Partners LLC in Miami.

While the white paper is clearly meant to urge advisers to buy the firm’s software, the estimates included in the white paper, “Investment Policy Statements: The Technology Return on Investment for Financial Advisors,” seem reasonable and should be of interest to advisers in terms of comparing their current procedures and the time involved in preparation of policy statements. 

For example, Mr. Boone breaks down the production of a statement using manual means into the following chunks: filling out the client questionnaire and organizing client data, 15 minutes; finding and inserting asset allocation models, 15 minutes; selection of benchmarks, 15 minutes; customizing the IPS for specific client requests, 30 minutes; entering client recommendations and proofreading the entire document, 60 minutes; and compliance review, 20 minutes.

Grand total, as mentioned above, is 155 minutes.

Mr. Boone claims that the same tasks performed on IPS AdvisorPro® would be 57 minutes.

In addition to the time breakdown, the article also has cost estimates for creating and updating statements manually versus using an online tool.

For example, Mr. Boone estimates that a 50-client firm will spend $22,500 in policy statement creation using a manual process, while a 250-client firm will spend $112,500.

He estimates a cost savings from $16,300 to $81,500 if advisers use an online solution instead.

For more information on the software, visit IPS AdvisorPro® online.

Firefox reaches a billion downloads

Since it was introduced in November 2004, Firefox web browser software has had over billion downloads of That milestone was reached last night, as tracked by the download counter at the spreadfirefox.com site.

The browser was created and is maintained by the Mozilla Foundation based in Mountain View, Calif. with the help of thousands of volunteers.

The browser remains Redmond Wash.-based Microsoft Corp.’s top competitor despite entries by the Safari browser from Apple Inc. of Cupertino, Calif. and the Chrome browser from Google Inc. of Mountain View, Calif.

The choice of web browsers is going to continue to be of interest to advisers as a significant percentage are now favoring applications hosted on the Internet. In a technology survey conducted by InvestmentNews last June, 24% of respondents preferred web-based applications, edging out the 23% who favored desktop or self-hosted applications.

Meanwhile 40% of advisers were in favor of a combination of both.

For more information visit the Mozilla blog and Spread Firefox website.

An investment policy statement helps an advisor communicate to relevant parties the procedures and investment philosophy of that advisor, and it documents the agreements between the advisor and the client about how that client’s money will be managed. The statement should provide the guidelines for investment decisions and set forth the responsibilities of each party.

When our first article about investment policy statements was published in the Journal of Financial Planning in July 1992, very few advisors were using these statements in their practices. Today, the landscape has significantly changed: It is now considered a best practice to provide investment policy statements to all clients, whether or not it is legally directed. Although some compliance officers may disagree, we believe that a properly written investment policy statement can be critical in minimizing the legal liability of your fiduciary clients (qualified plan trustees and trustees of irrevocable trusts, endowments, foundations and charitable trusts) and for that matter, all your clients. 

Download a PDF version of this article here.

In our experience, providing an investment policy statement, or IPS, helps to increase client satisfaction—and, subsequently, client retention. An IPS gives clients a better understanding of what to expect from their advisor. That clarity can help to build a much higher level of trust and respect, which can lead to larger accounts and more referrals.

This article explores the rationale for an IPS, the components of an IPS, and the ways you can integrate the use of an IPS into your client relationships.

The Regulatory Environment

There are two levels of legal and regulatory oversight: the legal requirements for clients who are fiduciaries or trustees for an account, and the regulations applicable to an advisor’s practice. It is important to understand the requirements for each. Let’s start out first with the legal requirements for your clients.

ERISA: A Clear Policy and Prudent Procedures

An investment policy is required under virtually all investor circumstances, with the exception of individual investors. According to the Employee Retirement Income and Security Act of 1974, as amended (ERISA), for every qualified company retirement plan (e.g., 401[k], profit sharing, pension, 403[b]) there are certain fiduciary responsibilities to manage the plan assets with the care, skill and diligence of a prudent expert and to diversify the investments of the plan so as to minimize the risk of large losses. The IPS documents these fiduciary responsibilities and helps ensure they are being adhered to.

When auditing an ERISA plan, the U.S. Department of Labor regularly asks to review the associated IPS. The rationale for this request is in the Department of Labor Interpretive Bulletin 29 CFR 2509.94-2 which references  ERISA Sections 404(a)(1)(A) and 404(a)(1)(B, specifically stating, “The maintenance by an employee benefit plan of a statement of investment policy designed to further the purposes of the plan and its funding policy is consistent with the fiduciary obligations set forth in ERISA Section 404(a)(1)(A) and (B)….For purposes of this document, the term “statement of investment policy” means a written statement that provides fiduciaries who are responsible for plan investments with guidelines or general instructions concerning various types or categories of investment management decisions….”¹

Under ERISA, all qualified plan trustees have a special responsibility to “prudently” manage their plan assets for the sole benefit of the plan participants. ERISA and the Department of Labor have established the following prudent procedures for plan trustees:

• An investment policy must be established²
• Plan assets must be diversified³
• Investment decisions must be made with the skill and care of a prudent expert⁴
• Prohibited transactions must be avoided⁵

A properly written IPS can help ensure compliance with legal requirements as trustees of a qualified plan. The IPS sets forth the objectives, restrictions, funding requirements and general investment structure for the management of the plan’s assets—and provides the basis for evaluating the plan’s results. By establishing the criteria and procedures for selecting investments and investment managers, an IPS can minimize “Monday morning quarterbacking” if investment performance is disappointing.

An IPS also can help trustees communicate a plan’s investment guidelines and procedures to those assisting in the investment process, such as investment advisors or money managers. Finally, and most importantly, an IPS provides a guide for making future investment decisions. Having and using the policy statement compels the trustees to be more disciplined and systematic, which in itself should improve the odds of meeting the investment goals.

UPIA: A focus on the Total Portfolio

The Uniform Prudent Investor Act (UPIA) is state-adopted legislation that governs the investment conduct of private family trusts. First enacted in 1994, it serves as the cornerstone of subsequent legislation (and drives how the courts now interpret such requirements relating to ERISA). UPIA requires a written investment policy for every trust in which trustees manage assets for the benefit of others. UPIA formally requires a focus on the total portfolio, rather than following the act’s earlier guidance that individual investments should be evaluated independent of whether or not they were appropriate for portfolio inclusion. The total portfolio is now the fiduciary’s central consideration when judging the tradeoff between risk and return. There are no more restrictions on the types of investments that can be included in the portfolio; the trustee can invest in anything that helps achieve the risk/return objectives of the trust and that meets the other requirements of prudent investing.

UPIA specifies that diversification is part of the definition of prudent investing. It also makes clear that if appropriate investment processes are in place and followed, the trustees will not be held responsible for the results. Under UPIA, the delegation of investment and management functions is permitted and encouraged.

Additional Legislation

The following two acts, which are largely consistent across the country but individually approved by each state, are substantially similar to UPIA; both require a written IPS.

• The 1997 Uniform Management of Public Employee Retirement Systems Act—addresses trustee responsibilities of government-sponsored qualified employee benefit plans

• The 2006 Uniform Prudent Management of Institutional Funds Act—addresses the responsibilities of trustees of nonprofit monies (primarily foundations and endowments)

The following table shows the legislation affecting different type of clients.

Relevant Legislation Requiring an Investment Policy

Now let’s look at the legal requirements for advisors.

Suitability and Fair Dealing

The regulatory environment is constantly evolving, but trends are clearly moving toward greater consumer protection. (Financial Industry Regulatory Authority [FINRA] member firms) are subject to two primary obligations in terms of consumer protection: “suitability” and “fair dealing.” RIA firms must satisfy additional fiduciary standards of care and client protection. Well-thought-out procedures are critical to satisfying these requirements. An IPS can help satisfy regulatory auditors by documenting the appropriate implementation of these procedures.

FINRA member firms are subject to a “suitability” requirement; this is described in the Financial Industry Regulatory Authority (FINRA) Rule 2310. When a broker recommends that a client buy or sell a particular security, that broker must have a reasonable basis for believing that the recommendation is suitable for that client. In making this assessment, the broker must consider the client’s risk tolerance, other security holdings, financial situation (income and net worth), financial needs and investment objectives, among other things. RIAs are subject to fiduciary standards for suitable recommendations.

In addition to the suitability requirement, FINRA member firms must comply with a “fair dealing” requirement which is also described in FINRA 2310. According to this rule, sales efforts will be judged on the basis of whether they can be reasonably said to represent fair treatment for the persons to whom the sales efforts are directed. An “obligation of fair dealing” means that brokers must have reasonable basis for believing that their securities recommendations are suitable for and appropriate to certain customers in light of the customers’ financial needs, objectives and circumstances.

Again, a well-crafted IPS will include all the relevant information needed for the broker to establish that both the suitability and fair dealing requirements have been satisfied.

Additional Requirements for RIAs

The fiduciary standards of care for RIA firms is even higher. RIAs must carry out their responsibilities with the utmost degree of good faith, honesty, integrity, loyalty and undivided service of the beneficiary’s interest. The good faith clause requires RIAs to act reasonably in order to avoid negligent handling of the beneficiary’s interests and mandates that they not favor anyone else’s interest, including the fiduciary’s, over that of the client. The other qualities speak for themselves. With that in mind, FINRA standards of “suitability” and “fair dealing” seem to be reasonable standards by which RIA firms would also be well-advised to comply.

Whether or not fiduciary responsibilities have been satisfied is not determined by investment performance, but by whether prudent investment practices and standards have been followed. In our opinion, the preparation of the IPS is one of the most important functions of the RIA. In some U.S. Securities and Exchange Commission (SEC) districts, auditors are asking to see the IPS for a particular client relationship. While the SEC isn’t consistently asking for this documentation yet, we suspect that the IPS will increasingly become a factor in audits of client records.

Well-thought-out procedures are critical to satisfying both FINRA and RIA requirements as well as creating a positive and open environment between the advisor and the client. In addition, a well-crafted IPS that addresses relevant information about the client goals and circumstances and about the investment procedures to be followed by the advisor can help satisfy regulatory requirements by documenting the appropriate implementation of these procedures.

The Investment Process

The most frequent questions we hear from advisors are: “How do I start including an IPS in my practice?” and “What should I include in my IPS?”

Following is our suggested approach to investment management and client relationship management. This is the approach we have successfully taken in our own investment advisory practices for many years.

We see the investment process as a series of six steps, as shown in the following diagram. We believe that the creation of the IPS is the single most important step in this process. All the other steps either lead into the IPS, or are directed by it.

1. Initial Discovery. Learn about the client’s circumstances, goals, income needs, restrictions, current holdings, risk tolerance, etc. We recommend developing a questionnaire to help ensure that all clients are asked the same questions and that important issues are consistently addressed. During your client meeting, use the following best practices.

• Provide an agenda.
• Clarify to your client that there are no right or wrong answers.
• Hand out or introduce the questionnaire.
• Go through each question; have each client discuss or write down his or her answers.
• Make sure each client understands each question.
• Offer appropriate details on more technical questions.
• In closing, review how you will write the first IPS draft.

2. Discussion and Agreement. Talk with your clients about the issues that must be agreed to before you can appropriately manage their money. This gives you an opportunity to set appropriate expectations and come to agreement on issues such as the degree of client involvement, the asset allocation to be used, the kinds of instruments you’ll be investing in (or not), your approach to taxes and investing, dollar cost averaging and a host of other implementation concerns.

3. Creating the IPS. Once you and your client(s) have agreed on the full list of issues and policies to be followed, record these agreements. This document will become the IPS. The client(s) and the advisor sign the document, signifying each party’s acknowledgement of the agreements.

4. Investment Implementation. We recommend that you do not conduct any trades in a client’s accounts until an IPS in place. Once the IPS has been signed by all parties, you are free to conduct all the initial and ongoing trades according to the road map provided by the IPS. Remember: The IPS provides guidance for how decisions will be made; it is not a list of the specific securities to be used. This is one of the areas that cause frequent confusion among advisors. If you include a list of the specific securities to be used in the IPS, each time you change investments you will have to go back and update the IPS. This is neither necessary nor productive.

5. Ongoing Communication. Describe and reach agreement about the frequency of meetings and reports, as well as the respective responsibilities of the advisor and client.

6. Monitoring and Adjustment. Rarely does a portfolio stay as originally structured. Describe in the IPS how you will monitor the portfolio for poor performers, how you will go about choosing good performers, how you will approach rebalancing and tax loss harvesting opportunities, and any other ways you will try to ensure that the portfolio stays in line with the objectives set forth in the IPS.

Clients and their needs change over time. That’s why it’s important to periodically go back to the first step—discovery—to make sure you are addressing the client’s current needs and wishes. Every year or two, the IPS should be reviewed with the client to ensure continued agreement with its provisions. This review offers an opportunity to remind a client about all the things you do to make sure the client’s portfolio continues to serve his or her needs, and it reminds the client of your philosophy and approach; all of which helps to avoid surprises and disappointments.

You can also use the periodic review to modify the IPS to reflect any changes in the client’s goals or circumstances, as well as any changes in your own procedures. If you do what your client expects you to do, then you are more likely to have a happy client.

What Should Be Included in an IPS?

Let’s first address what shouldn’t be included. You should never write something in an IPS that you, as the advisor, cannot commit to. For example, although we believe that a well-crafted IPS will describe the advisor’s rebalancing methodology, if you don’t regularly rebalance, leave out the issue of rebalancing¾or describe what it is that you do.

Also, if you are using someone else’s template or suggested wording as the basis of your IPS, make sure that you read through and edit the template until it reflects your own investment practices and procedures. Every advisor does things a little differently, so the odds are strong you’ll need to make a number of changes in wording.

An IPS usually has five major components that should be unique to each client.

1. All key factual data about the client, including where the client’s assets are held, the amount of the client’s assets under your management, and the identification of the trustees or interested parties to the account. This can be as detailed or as simple as you wish.
2. A discussion and review of the client’s investment objectives, investment time horizon, anticipated withdrawals or deposits, need for reserves or liquidity, and attitudes regarding tolerance for risk and volatility.
3. Any constraints and restrictions on the assets, such as liquidity and marketability requirements, diversification concentrations, the advisor’s investment strategy (including tax management), locations of assets by account type (taxable versus tax-deferred), how client accounts that are not being managed (if any) will be handled, and any transaction prohibitions.
4. The security types and asset classes to be included in or excluded from the portfolio, and the basic allocation among asset categories and the variance (rebalancing) limits for this allocation.
5. The monitoring and control procedures and responsibilities of each party.

The IPS and the Advisor-Client Relationship

What defines a successful advisor-client relationship? We suggest that both parties are more likely to be happy when the client gets what is expected, understands the various aspects of the engagement, and accepts and implements the advice—and when the relationship is profitable and beneficial for both client and advisor.

The IPS development process lays the foundation for a successful relationship. Advisors who use this process find that taking a little more time with clients up front helps to cement the relationship and brings opportunities for more and better business. Clients appreciate the extra effort and the greater clarity the IPS development process brings to them.

Another important benefit of using an IPS is that clients have a better understanding of what the advisor is going to do with their money, and of their advisor’s approach. They understand there is a reason why each action is being taken. As a result, they are more confident in the advisor’s abilities and, therefore, more willing to release control, thereby making it more likely that clients will feel comfortable with you taking full discretion.

Granting of full discretion can only happen if the client trusts your abilities and approach. Systematically ensuring a full discovery of the client’s relevant facts and issues, reaching clear agreements about how the investments will be managed, and documenting it all in an IPS will build the foundation for that trust.

If your clients have confidence in you, they won’t be calling to ask you to move their accounts to safer vehicles when the markets go through a down period. The IPS establishes investment guidelines and a framework for long-term investment thinking. Simply reminding your clients of what they agreed to in the IPS is often enough to calm their nerves.

If clients continue to ask about moving their accounts, remind them that it may be necessary to update their IPS in order to implement their changed instructions. When, per the IPS agreement, the document itself must be changed as a precursor to modifying the portfolio, clients are more likely to realize the seriousness of their request. The IPS serves clients well by providing a framework for them to use as they think about investment decisions. The IPS can also help ease them through difficult market periods, which obviously makes the advisor’s life easier as well.

As you think about how you manage your clients’ investments, here are some questions to ponder for each of your clients:

• Were risk and return objectives defined and reasonably suited to the client?
• Were all conflicts of interest fully disclosed?
• Was an overall investment strategy established?
• Were the purposes, terms, distribution requirements and other circumstances of the client considered?
• Were reasonable care, skill and caution exercised?
• Were decisions respecting individual assets evaluated in the context of the portfolio as a whole?
• Is there a consistent approach to investment decision making?
• Is all of this information documented in an investment policy statement?

We suggest that if you can answer “yes” to all of these questions, you should be on your way to fulfilling your compliance responsibilities and building a foundation of strong communication and clear expectations between you and your client—an ideal combination!

About the Authors

Linda Lubitz Boone is founder and president of The Lubitz Financial Group in Miami, Florida, which provides fee-based personal financial planning and investment advisory services for individuals and company-sponsored retirement plans. She is also the managing director of the East Bay Region of Mosaic Financial Partners, Inc. Nationally, she served on the board of directors of the Financial Planning Association from 1999 to 2002 and was chair of the Conference for Advanced Planning in 1996. She is currently an emeritus member of the advisory board of the TIAA-CREF Institute.

Norman M. Boone is founder and president of Mosaic Financial Partners, Inc. in San Francisco. He has been recognized by Worth magazine as one of the top financial advisors in the U.S. every year since the list was first published in 1994, and has been regularly listed in Barron’s, Medical Economics Magazine and other publications. He is a regular industry columnist and has written a number of articles about investment policy statements and other financial topics.

Mr. Boone and Ms. Lubitz Boone are co-authors of Creating an Investment Policy Statement: Guidelines and Templates. Together, they developed IPS AdvisorPro^®, an online software tool to help advisors systematize and improve the process of writing investment policy statements.

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Compliance Resources on www.schwabinstitutional.com

Visit www.schwabinstitutional.com for compliance and regulatory information. Schwab works with third-party firms to provide select resources that help keep you informed of certain regulatory and compliance developments. The site features Compliance Hot Topics, Templates and Guideline Documents, a Rulemaking Calendar, archived issues of Compliance Review, Third-Party Resources and Discounts. A unique resource, this single-destination compliance site is complimentary and exclusive to advisors who work with Schwab Institutional^®. Visit www.schwabinstitutional.com > Resource Center > Compliance today!

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1. Part 2509 of Title 29 of the Code of Federal Regulations. Department of Labor 29CFR 2509.94-2– Interpretive    bulletin relating to written statements of investment policy, including proxy voting policy or guidelines.
2. Department of Labor 29 CFR 2509.94-2.
3. ERISA Section 404(a)(1)(C).
4. ERISA Section 404(a)(1)(B).
5. ERISA Section 406(a)–(b).

The services and opinions of the authors are independent of Charles Schwab & Co., Inc. Neither the authors nor their firms are affiliated with or are employees of Schwab. The articles and opinions in this publication are for general information only, and are not intended to provide specific compliance, regulatory or legal advice. Schwab makes no representations about the accuracy of the information in the publication or its appropriateness for any given situation. For further information, please contact your legal and/or compliance counsel.

©2008 Charles Schwab & Co., Inc.  All rights reserved. Member SIPC.

Schwab Institutional is a division of Charles Schwab & Co. Inc.   FTA 05116 (0808-xxxx) NWS15120AUG-08 (09/08)

“If there were only one tool every financial advisor must have to run their business, it would be IPS AdvisorPro™. I feel so strongly about Lubitz and Boone’s book and software that I recommend it to every one of our clients without fail. If you want to keep your clients and keep your clients happy, this is the right tool for you.”

Katherine Vessenes, JD, CFP® President of Vestment Advisors, nationally known authority on investment advisor and broker-dealer compliance issues and author of “Protecting Your Practice” and “Building Your Multimillion Dollar Practice.” Katherine, VestmentAdvisors.com

Overview

• The regulatory environment is an ever-evolving one, but the trends are clearly moving toward greater consumer protection. Broker-dealers and registered firms are subject to two primary obligations that are relevant here: the “suitability” requirement and the “fair dealing” rules. Registered advisory firms must satisfy fiduciary standards of care and client protection that go even further. Well thought-out procedures are critical to satisfying these requirements. Adequate record-keeping can serve to satisfy regulatory auditors, by documenting the appropriate implementation of these procedures.
• In addition to enhancing the trust bond between the client and the advisor/rep thus improving sales opportunities, using an IPS as part of the investment process clearly documents the relevant information about the client’s circumstances, goals, risk tolerance and other requirements. Doing so also helps to establish a transparency between client and advisor, helping to avoid future misunderstandings and establishing a basis for an improved relationship.
• IPS AdvisorPro™ provides a system through which the compliance office can control the verbiage used in IPS documents, can enforce a system of usage among the advisors or reps within the firm, can consistently measure and document each client’s risk tolerance, can guide investment decisions to encourage consistent use of appropriate investment policies (such as asset allocation), and permits the compliance officer a means of supervising the actual IPSs written by the advisors/reps to ensure on-going compliance.

Compliance Requirements

•NASD

o  At minimum, NASD firms have a “suitability” requirement. When a broker recommends that you buy or sell a particular security, that broker must have a reasonable basis for believing that the recommendation is suitable for that client. In making this assessment, your broker must consider your risk tolerance, other security holdings, financial situation (income and net worth), financial needs, and investment objectives. The major securities industry self-regulatory organizations have suitability rules. The NASD’s suitability rule – Rule 2310 – and other NASD materials concerning suitability can be found in the NASD Manual on NASD’s website.
o In addition to “suitability,” NASD firms are subject to “fair dealing” rules whereby sales efforts must be judged on the basis of whether they can be reasonably said to represent fair treatment for the persons to whom the sales efforts are directed.
o The proposed rules from the NASD and the SEC for variable annuities essentially track the ideas and language of antifraud provisions of federal securities laws and rules from other self-regulatory organizations, which obligate a registered representative to recommend only securities which are “suitable” to any particular customer. That “obligation of fair dealing” means that registered representatives must have reasonable bases for believing that their securities recommendations are suitable for and appropriate to certain customers in light of the customers’ financial needs, objectives and circumstances.

o NASD Conduct Rule 2310 — Recommendations to Customers (Suitability)

• In recommending to a customer the purchase, sale or exchange of any security, a member shall have reasonable grounds for believing that the recommendation is suitable for such customer upon the basis of the facts, if any, disclosed by such customer as to his other security holdings and as to his financial situation and needs.

• Prior to the execution of a transaction recommended to a non-institutional customer, other than transactions with customers where investments are limited to money market mutual funds, a member shall make reasonable efforts to obtain information concerning:

• the customer’s financial status;
• the customer’s tax status;
• the customer’s investment objectives; and
• such other information used or considered to be reasonable by such member or registered representative in making recommendations to the customer.

• For purposes of this Rule, the term “non-institutional customer” shall mean a customer that does not qualify as an “institutional account” under Rule 3110(c)(4).

• [Amended May 2, 1990 eff. for accounts opened and recommendations made after Jan. 1, 1991; amended by SR-NASD-95-39 eff. Aug. 20, 1996.]

o IM-2310-2. Fair Dealing with Customers

• Under Rule 2310-2 representatives subject to NASD regulation have an obligation to deal fairly with customers. Implicit in all member and registered representative relationships with customers and others is the fundamental responsibility for fair dealing. Sales efforts must therefore be undertaken only on a basis that can be judged as being within the ethical standards of the Association’s Rules, with particular emphasis on the requirement to deal fairly with the public.

• This does not mean that legitimate sales efforts in the securities business are to be discouraged by requirements which do not take into account the variety of circumstances which can enter into the member-customer relationship. It does mean, however, that sales efforts must be judged on the basis of whether they can be reasonably said to represent fair treatment for the persons to whom the sales efforts are directed, rather than on the argument that they result in profits to customers.

• Specific violations calling for disciplinary action extend to speculative activity, excessive or inappropriate trading, use of fictitious accounts, Transactions in discretionary accounts in excess of or without actual authority from customers, unauthorized transactions, misuse of customer funds, or recommending the purchase of securities or the continuing purchase of securities in amounts which are inconsistent with the reasonable expectation that the customer has the financial ability to meet such a commitment.

• RIA firms

o RIA firms have an even higher standard of care established by fiduciary standards under which the fiduciary owes an obligation to carry out the responsibilities with the utmost degree of “good faith, honesty, integrity, loyalty and undivided service of the beneficiary’s interest.” The good faith has been interpreted to impose an obligation to act reasonably in order to avoid negligent handling of the beneficiary’s interests as well the duty not to favor anyone else’s interest, including the fiduciary’s, over that of the client.
o Fiduciary liability is not determined by investment performance but rather by whether or not prudent investment practices and standards were followed. The preparation of the Investment Policy Statement is considered one of the most important functions of the fiduciary
o Further, if the advisor should find him/herself in a position of conflicting interests, the advisor must disclose the dual agency (acting for two parties at the same time).
o In ordinary cases the standard of care is whether or not the accused behaved as an ordinary, reasonable prudent person would have behaved under the circumstances. When acting as a professional however, the required standard of care changes. Such individual is required to use any special knowledge he may have obtained through education, training or experience. Therefore, if a person offers professional services to the general public, it is presumed that the person possesses some degree of special skill or knowledge.
o A professional negligence case imposes a certain level of skill and knowledge on the accused whether or not he actually possesses that skill or knowledge. This is a standard of minimum professionally acceptable conduct. Though the standards have not been applied until most recently to financial planners, it would appear that the essence- for them as well as brokers at least- is that the adviser put the clients interest first and acts with the best interest of the client in mind.

• When is an IPS required?

o Investment Policy Statements are required under virtually all investor circumstances with the exception of individual investors.

• ERISA (Employee Retirement Income and Security Act of 1974, as amended) requires an IPS exist for every qualified company retirement plan (e.g. 401k, profit sharing, pension, 403b, etc). “…there must exist a clear investment policy” which suggests the need for a written document, an IPS. In its audits of ERISA plans, the Department of Labor regularly asks to review the IPS as one of its initial requests. The ERISA Section 404(a)(1)(A) and (B) are the pertinent code sections. There is also an interpretive bulletin on the topic. (29 CFR 2509.94-2 – Interpretive bulletin relating to written statements of investment policy, including proxy voting policy or guidelines. (see Section Number: 2509.94-2, “Interpretive bulletin relating to written statements of investment policy, including proxy voting policy or guidelines. Also See: http://www.dol.gov/dol/allcfr/title_29/part_2509/29CFR2509.94-2.htm)

• The 2006 Uniform Prudent Management of Institutional Funds Act (addressing trustee responsibilities of trustees of non-profit monies, primarily foundations and endowments) is substantially similar to the UPIA and requires a written IPS.

• The Uniform Prudent Investor Act (UPIA) governs the investment conduct of private family trusts and serves as the hall mark of subsequent legislation (as well as how the courts now interpret such requirements relating to ERISA) requires a written investment policy for every trust in which trustees manage assets for the benefit of others. It also makes clear that if appropriate investment processes are in place and followed, the trustees will not be held responsible for the results.

• The 1997 Uniform Management Public Employee Retirement Systems Act (addressing trustee responsibilities of government-sponsored qualified employee benefit plans) is substantially similar to the UPIA and requires a written IPS.

• Question: if the regulators require that an IPS be in place for these client types, why would it be any less important for an individual client?

• Plan sponsors are responsible for acting in a prudent and deliberate way, and if they are challenged, they need to have evidence of a prudent decision-making process. If you don’t have a paper trail of what you’ve done and why, you can’t prove that you’ve had a diligent policy in place.

• Similarly for individual clients, being able to document what you’ve done and why can be critical in litigation, with an unhappy client or unhappy heirs. Having a client signature on a document which directs the advisor/rep to act in such a way and with an explanation of why, can be unassailable evidence of no wrong-doing.

Ken Ziesenheim, JD, LLM, CFP® wrote a pertinent article in Investment Advisor magazine, July 2006 in which he made the following statements:

• The IPS process can help build a successful practice because the process can become mechanism for updating and retaining clients, and even attracting new clients.

• The simple premise on which it is based provides an IPS with the flexibility that enables it to be used with individual clients to help make difficult decisions easier. Since accountability and responsibility are defined in the statement, each step becomes a small component of the overall decision-making process.

• There are other benefits to an IPS. It provides a framework for evaluating investment performance and aids in clear communication between advisor and client. Finally, it helps dispel the root causes of dysfunctional client/advisor relationships based on the old sales model of emotional transactional selling. A functional business model does not rely on psychological and emotional rationale to get someone to say yes.

• Using the IPS as a business system ensures that advisors hold rational and logical client discussions and that those clients have acknowledged an investment decision-making process in writing, adding an extra layer of compliance protection to your firm or to you as the advisor. This process ensures that both the advisor and client are in sync and serves as a guideline for managing clients’ assets and expectations. When used properly, the IPS can be a practical tool that embodies the essence of the financial planning process.

Compliance tools built into IPS AdvisorPro™

User Rights

In the online software application IPS AdvisorProTM, when a new user is added to the system under a license, as can be seen below, there are three levels of user rights: General Administrator, Compliance Moderator and General User. For confidentiality reasons, client IPS’s created by one General User cannot be viewed by any other General User, but Administrators and Compliance Moderators have access to all IPS’s created under that license. In addition, any user can be given or not given rights to:

• Create or modify IPS Templates

• Create or modify Asset Allocation Models

• Modify any Asset Allocation Model for a particular client,   without affecting the models themselves.

Those with administrative rights or those general users granted rights are the only ones who can access the following screen, allowing only them to create and modify templates, asset classes, or the asset allocation models.

Template Management:

Within IPS AdvisorProTM a “template” is the basic wording and formatting of the IPS. Responses to the questionnaire and the selection of the Asset Allocation Model flow into the template to create a draft version of the IPS. Upon review, the draft IPS can be further modified so that every part of the document is customized to reflect the unique requirements of each client.

Those with administrative rights can determine which templates are available to users, whether to make it the default template for a particular kind of client (e.g. an individual or a profit sharing plan), how many alternative templates are available to choose from, if any, and whether to keep or delete each template in the list available to all users under that license. Administrators can edit existing templates or create news ones.

As an example, under the “Charitable Trust” type client, the administrator might wish to make slight modifications to the Charitable Trust template so that there are templates for a Remainder Trust, a Lead Trust, an Annuity Trust, and a Remainder Trust with a Net Income Make-up provision. Then, when the user is creating his or her IPS, they’ll have the necessary wording established for them by choosing the appropriate template affiliated with the Charitable Trust client type.

Every part of every IPS AdvisorPro^TM template is available to those with administrative rights to modify. At the start up “Wizard” process, the templates are reviewed and modified to fit the licensee’s processes and procedures. Once in the application, you can do the same thing. As can be seen below, for each paragraph of every templates, the user has full rights to edit, move or remove it. New paragraphs can be inserted above or below any paragraph. The administrator can also find a paragraph in another template within the system under this license and insert it above or below any paragraph. Finally, paragraphs can be “response dependent” which means that based on how any specified question in the questionnaire might be answered, then particular wording would be applied (i.e. if “yes” then use this wording…, but if “no” use that wording….)

Note that under the column “Display Options” a paragraph or section may or may not be designated as editable by others, and it may or may not be required (i.e. must always be present when this IPS template is utilized).

Further, all the verbiage in each paragraph is fully editable. Editing can be done at the template level, where only those with administrative rights can make changes or create new templates. It can also be done IPS by IPS.

In the set up process, the administrator or compliance officer has a high degree of control about what users can edit or not in their IPS’s. As shown below, the editing page is broken into two parts: 1) the editing screen, and 2) the control features for that section of the IPS.

• If, at the bottom, the administrator checks “Yes, this paragraph is required….” Then the paragraph will always appear in the IPS.
• If “Do not allow this paragraph to be edited by general users” is checked, then no user will be able to edit it at any point.
• To save time and effort, these changes can be broadcast to any or all of the IPS templates which contain this section (in the shown example “ERISA Discussion” only three templates contain the relevant section, so the broadcast can only go to those three—pension, “profit sharing” (defined contribution plans), and self-directed 401k plans (also 403b)).

Header/Footer

By clicking in the Navigation Box on “Header/Footer” you can navigate to the following screen where you have control over any of the six possible messages that can be placed in the header or footer (e.g. “Past Performance is no guarantee of future results”) that cannot be modified by general users.

Compliance Officer Supervision

Not only can the compliance officer determine what words are in the IPS and which of them will be editable by general users, the compliance officer has two ways to review every IPS under the IPS AdvisorPro™ license. The compliance officer can access every IPS created under the firm license and review it in its entirety, or more reasonably, the compliance officer has the ability to quickly review summary data on every IPS built under the license.

Crafting a governing document helps you and your clients concentrate on long-term objectives. And new technology makes it easier than ever to develop comprehensive and customized investment policies.

Imagine a plainly written document that helps you and your clients remember long-range objectives as well as potential losses they agreed to tolerate in the short run. Envision clients signing off on that form each year while pledging to notify you of any life changes that affect their portfolio goals.

Sound like a dream? Well, you can make the dream come true with an investment policy statement, or IPS.

The value of an Investment Policy Statement

Investment policy statements serve as valuable road maps in client relationships. Traditionally, institutional money managers used investment policy statements with qualified retirement plans or the trust accounts of the super-rich. But more retail advisors these days see the value in creating policy statements for most, if not all, their clients.

A good IPS accomplishes the following:

• Clarifies investment performance expectations
• Documents client financial objectives and risk tolerance
• Describes selected asset classes and allocations
• Details which benchmarks will be used to evaluate performance

While you probably talk over these issues with clients, having a written document serves as an insurance policy should clients become disaffected. The signed policy reminds clients of the original goals you discussed with them when they hired you , and it documents that you followed the agreed-on game plan. It keeps everybody on the same page.

“By using and following the IPS, we are better able to defend our advice and value to all our clients,” explains Delmar Gillette, a registered investment advisor in Newport News. Va. “It puts in plain English what the client wants to accomplish and the risks they are willing to take. It also provides a measurable standard by which we can reasonably be evaluated.”

Focus on potential risk

One key aspect of an IPS is to remind clients of potential losses they agreed to accept, This is especially valuable in a down market. For instance, an investment policy statement might include something like this:

• Client X could accept losing 15% in any single year. Over a five-year period , he could tolerably lose 3% annualized.

When the market falters to the tune of, say , 6% in any given year, an advisor can point back to the risk range outlined in the investment policy statement, as well as to the benchmarks chosen to help put the client’s investment performance into perspective.

Who needs an investment policy statement?

Traditionally, financial advisors have used the IPS only with institutional clients such as qualified retirement plans or endowments. Retirement plans, subject to the provisions of ERISA, must be managed according to a consistent policy. Endowment accounts also typically involve fiduciary responsibility and discretionary money management, both of which require a formal document that outlines the investment objectives and process.

But the inherent value of an IPS makes it a useful tool for all clients, not just those with legal obligations.

“We think an IPS ought to be used anytime an advisor has money to manage for a client,” says Norm Boone, president of Mosaic Financial Partners in San Francisco and co-creator the new IPS AdvisorPro software, which helps advisors customize comprehensive investment policies for eight different client types. “If it’s right for big clients, why not smaller ones?”

Boone contends that documenting expectations up front leads to longer relationships with all clients and possibly more referrals. “If they know what’s coming, they’ll stick with you in bad times because they knew it was going to be part of the experience. If they stick with you, you’re not going to have to acquire as many new clients. And you’re more likely to receive referrals from them.”

Bringing the IPS to the masses

Bruce Hagan, an independent planner in Tallahassee, Fla., has faithfully employed an IPS for years with most of his investment accounts, utilizing an old Ibbotson IPS builder, a product now rolled into a web based suite. “I create an IPS wherever there’s a need for a financial plan or asset allocation,” Hagan explains.

However, he says, there are a few occasions where he wouldn’t use one. “If I have a small business setting up a SIMPLE IRA account for five employees and the employees are contributing $50 to $100 per month, I’m not going to go through the effort of creating an IPS for each of them. Similarly, I wouldn’t use an IPS with a retiree who just wants a CD or a bond. But other than that, I use it extensively.”

Here are some thoughts from other advisors who are considering incorporating IPSs in their process or have just begun to use them routinely:

• “I see the need to write one for every relationship as I move my practice forward,” says Joe Bustin, an independent wealth manager in Norwalk, Iowa.
• “I currently do not use an IPS and I need to find a way to implement it and make it a part of my system of doing things.” explains financial planner Tim Reik in Altamonte Springs, Fla.
• “I have been searching for a way to effectively and accurately prepare IPSs for my clients for several years now,” reports Susan Kendall, an independent planner in Pacific Grove, Calif.
• Kendall. She recently subscribed to the IPS AdvisorPro service, which she describes as easy to use. “We are in the process of updating and preparing IPSs for all our fee-based clients. The IPS
• AdvisorPro software allows us to customize the IPS easily to best serve all of our clients. I believe that an IPS sets us apart as professionals and offers us a competitive advantage.”
• Becky Gaylor, founder of Active Money Management in Phoenix, also recently began a new IPS system: “We are just beginning to use some wonderful software (BetaVest) that helps to create the IP for each client while educating them and continually monitoring ,” she explains. ”This is especially helpful for client reviews. It’s a process called CASE management: Cashflow, Asset Allocation, Sequence of Valuations, and Expectation Management.”

Creating your own IPS

Customization is the hallmark of investment policy statements. No two are alike, nor must they be dozens of pages long. In fact, just one to five pages-especially for smaller clients-will generally suffice. Whether you’re using a software program that allows you to populate your document from a questionnaire, or simply customizing a Word document you’ve created , an IPS generally includes the following information:

• Type of account
• Current assets
• Investment time horizon
• Return objective and expectations
• Risk tolerance and loss limit
• Asset allocation
• Allocation variance allowance
• Evaluation benchmarks
• Investment objectives
• Investment philosophy
• Preferences and constra ints
• Investment selection criteria
• Monitoring procedures

Senior Editor Nicole Coulter specializes in helping financial advisors manage their businesses more effectively. She has previously written about practice management issues or publications such as Registered Representative and Bank Investment Representative. Copyright Horsesmouth 2006.  http://www.horsesmouth.com/

Norm Boone, MBA, CFP®

By Norman M. Boone, MBA, CFP.  Published June 1, 2007 © Horsesmouth, LLC

An investment policy statement not only tells clients what to expect from you, it helps them make their investment decisions rationally instead of emotionally. And that can save everyone a lot of headaches.

Advisors who manage money for their clients are discovering the value and importance of using an investment policy statement (IPS) as a key part of their investment process. Clients appreciate the opportunity to better understand what to expect from their advisor. That clarity helps to build a much higher level of trust and respect, which can, in turn, lead to growing accounts and more referrals.

What is an IPS and why is it important?

An investment policy statement (IPS) is a written document that provides a record of the agreements reached between client and advisor with regard to the policies and procedures to be followed by the advisor in managing the client’s money. An IPS is legally required for all ERISA plans and for virtually all trust and institutional clients. Using an IPS with individual clients has so many benefits that it is now considered a best practice for advisors.
I have been using IPSs at my firm since the late 1980s and have been championing them in the industry for over 15 years with my partner Linda S. Lubitz, CFP, president of the Lubitz Financial Group in Miami.
The IPS question we hear most often from advisors is “How do I do it?” Following is our suggested approach to investment management in a nutshell—what both of us have been doing in our own investment advisory practices for many years.

Significant disclosure and communication

We believe that the creation and confirmation of the IPS is the single most important step in the investment process. We conceptualize the investment process as a series of six steps, all centered on the development and continued use of the IPS, as shown in the figure below.

6 Steps of the Investment Process
Let’s look closer at each of these steps:

1.    Initial discovery. First, we learn about the client’s circumstances, goals, income needs, restrictions, current holdings, risk tolerance, and so forth. This step takes not only good questioning but excellent listening.
2.    Discussion and agreement. Second, we talk with the client about the various issues and choices that must be agreed to before we can appropriately manage the client’s money. This gives us an opportunity to educate, set appropriate expectations, and find agreement on critical issues such as:

• the degree of client involvement
• asset allocations
• investment instruments
• our approach to taxes
• dollar cost averaging
• …and a host of other implementation concerns

3.    Creating the IPS. Once we have agreement on the full list of issues (systematized through a questionnaire to ensure we don’t miss anything), we record the agreements in the document known as an IPS. We and the client both sign the document, acknowledging and affirming our agreements.
4.    Investment implementation. It is important to note that we don’t do any trades in the client’s accounts until we have an IPS in place. Once the IPS has been approved by all parties, we are free to undertake initial and ongoing trades according to the roadmap it provides.
5.    Ongoing communication. Regular meetings, phone calls, e-mails, and periodic reports are all carried out as called for in the IPS.
6.    Monitor and adjust. Portfolios are not static. So, as laid out in the IPS, we monitor the portfolio for poor performers, rebalancing opportunities, tax loss harvesting, and other ways to keep the portfolio in line with the objectives set forth in the IPS.

Changing circumstances

As we all know, clients and their needs change over time. It’s important to periodically go back to step one to make sure you are addressing the client’s current needs and wishes rather than ones that are out of date. Every year or two, you and your clients should review their IPS to make sure that your clients still agree with everything in it.
This review offers an opportunity to remind clients about all the things you do to make sure the portfolio continues to serve their needs. It also helps remind them of your philosophy and approach. This serves to prevent surprises and disappointments. If you do what a client expects you to do, you are more likely to have a happy client.
Advisors who use this process find that taking a little more time with clients up front helps cement the relationship and generate opportunities for more and better business. Clients appreciate the extra effort and the greater clarity that comes with the IPS development process.

Renewing understandings

Another important benefit of an IPS is that clients have a better understanding of our approach. They understand we have a reason for each of the things we do with their money. As a result, they are more confident in our abilities and are much more willing to release control to us.
At each of our respective firms, Mosaic Financial Partners and the Lubitz Financial Group, we have full discretion for our clients’ accounts. This can only happen if clients are sufficiently comfortable with our abilities and approach. Working through the IPS process in partnership with clients forms the basis for that confidence. And it makes our lives much easier.

Adjusting to the market

If clients have confidence in us, they won’t be calling to ask us to move their accounts to safer investments when the market hits a rough period. The IPS establishes investment guidelines and a framework for long-term investment thinking. Simply reminding clients of what they agreed to in the IPS is often enough to calm their nerves.
If they persist, then a change in the IPS becomes necessary in order to implement the client’s changed instructions. Often, when we indicate the need to fundamentally change the IPS, clients realize the seriousness of their request. The IPS serves clients well by providing a framework for helping them think rationally about investment decisions, enabling them to get through difficult market periods. Doing so obviously makes the advisor’s life easier as well.

Getting started

If you want to start using IPSs, there are several good places to start, including our website, IPS AdvisorPro, and book Creating an Investment Policy Statement. Additional advisor-recommended books and online resources include:

• How to Write an Investment Policy Statement, by Jack L. Gardner
• Tools and Templates for Your Practice, by Deena B. Katz (includes sample one-page IPS and a PowerPoint IPS)
• BetaVest Investment Planning Solutions

And here are several sample IPS statements you can use as models:

• Individual Investment Policy Statement
• IPS for Retirement Plan
• IPS for Foundation

Norman M. Boone, MBA, CFP® and Linda S. Lubitz, CFP® are the co-founders of IPS AdvisorPro®, an online investment policy solution for the professional wealth manager. Boone is also the president of the San Francisco wealth management firm Mosaic Financial Partners, Inc. Lubitz’s independent advisory firm The Lubitz Financial Group is in Miami, Florida. You can reach them via email at Norm@IPSAdvisorPro.com or Linda@IPSAdvisorPro.com.

In these challenging and unprecedented times in the markets, many investors have a tendency to become nervous and raise questions about their portfolios and the health of their investments, creating additional needs for their financial advisor to address. Join us for an engaging and interactive web conference with Norm and Linda Boone, experienced financial advisors and architects of IPS AdvisorPro, the industry’s leading investment policy statement platform where they’ll share their approach to client management, ways to effectively use IPS’s and, decades of wealth management expertise.

Listen to the MP3 at WebLinkLive.com

http://www.weblinklive.com/5.0_ipRecordingPlayer/default.asp?c_psrid=EA57DB8387&time=87364.23612636873