Compliance Considerations
Compliance departments have a few concerns about investment policy statements.
First, it is critical that anything that is written down (promised) is what is actually delivered. One approach is to avoid writing anything down, but that violates a number of other principles, not the least of which is the need to develop/earn the client’s trust, which means being open with them and helping them clearly understand what they might experience. The better alternative is to make sure that you only write down in the IPS what you are actually going to do. You can (and should) be as detailed as possible in order to enhance client understanding, but you need to limit the details to accurate ones.
An IPS represents a critical opportunity for the advisor to gain the client’s trust, by fully reviewing the advisor’s investment processes and helping the client fully understand what they are likely to experience in good and bad markets. The process of reaching the agreements that are reflected in the IPS and then seeing those agreements well documented helps the client feel special and that the advisor’s services and advice for the client are customized to the client’s particular needs. (It may not be that customized, but all that counts is that the client feels that way!)
With this requirement in mind, it is therefore important that every IPS be customized to fully reflect the investment processes that a client will actually experience and that the advisor will actually deliver. There are two kinds of categories of these deliveries: 1) those unique to each client (will we dollar cost average or invest all at once? what will the asset allocation look like? what concentration or restricted investment considerations does the client have? how much liquidity do I need to maintain? etc.), and 2) those which are handled consistently across clients, but which may differ from one firm to the next (are we passive or active? when and how do we rebalance? what is our investment selection criteria? do we use funds or securities or active managers? etc).
IPS AdvisorPro allows for complete customization of the wording in the IPS document, so that the IPS can fully reflect how the advisory firm conducts its business. In addition, it offers a separate questionnaire for advisor choices which become the default unless something is going to be different for a particular client (in which can the answer to that question would be changed, just for that client). This means that a senior person (or CCO) can spend some time up front and ensure that the wording in the document and the advisor choices made in the questionnaire fully reflect the firm’s procedures. If a particular activity is not consistent, then the section in the IPS addressing that issue should either be deleted, or some mechanism needs to exist to easily make changes in the document to reflect that different approach for that particular client. IPS AdvisorPro makes it easily possible to do exactly that, by allowing for modifications to template wording and by asking the right questions in the questionnaire, the answers to which flow into the IPS document, thus allowing those critical parts to change from client to client.
IPS AdvisorPro also makes it easy to fully reflect the details that are important to the client. By using a detailed questionnaire and having the answers flow through to the IPS document in the appropriate place, every IPS is unique and fully reflects the concerns and circumstances of each client. It’s a powerful message about how special that client is.
Not only does the compliance department worry about the wording reflecting the actual deliverables, it worries about what the reps in the field are saying in their documents. IPS AdvisorPro handles this in two ways. 1) The compliance officer or a senior administrator has the ability to not only rewrite whatever wording they wish to change in the templates, but then they can “lock down” any part(s) of the template so that other users do not have the ability to modify those words or their location in the IPS document. This helps ensure that everyone in the field is including the important words and disclosures required by their compliance departments. 2) The compliance officer has the ability in IPS AdvisorPro to view both summaries of every IPS written within the system for that firm as well as the ability to quickly and easily bring up each and every IPS to review it in full. If there have been changes to the document template, it is easy to identify where these changes have been made.
For broker-dealer firms, compliance officers will be happy to know that FINRA has approved the default wording in IPS AdvisorPro templates. These, of course, are likely to be changed to best reflect the processes of an individual firm, but knowing that the starting point has FINRA approval can be an important comfort.
An IPS is clearly an important document that is legally required in many situations and is a critical client-relationship-enhancer where it is not mandated. To be at the head of the pack, using an IPS is not really a choice. Therefore, to be effective, firms need a way to be consistent and correct about what they say in their IPSs and a way to control and review that language. IPS AdvisorPro helps to make all of that possible, while also saving time to produce an IPS and improving the look and feel of the IPS.
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