Step One to Fiduciary
This article originally appeared on Inside Information. Used with permission.
Inside Information ~ Filed Under Practice Management, February 2007
Bob Veres, Publisher, Inside Information
“The definitive tool for creating investment policy statements is back — and a LOT more powerful than the earlier version.”
If we’re moving into a fiduciary world, then it seems likely that, eventually, clients will receive some kind of investment policy statement from their advisors — just like qualified plans do, by law, from THEIR advisors today. And why not? The IPS clarifies the purpose of the portfolio, defines how it will be managed, and (most importantly) it becomes something you can come back to if the client starts asking why you weren’t more heavily weighted in emerging markets funds or REITS following some kind of freakish runup. From a compliance standpoint, it creates a clear record of the investment agreement between advisor and client. Wealthier clients like the idea that their assets are being given the same treatment as large pension plans. And if you do decide to manage a client’s 401(k) plan, you need to have an IPS to define the relationship.
Yes, that’s all well and good, but who has time to sit down and compose a new investment policy statement from scratch for each and every client? Isn’t there some way to automate the process?
Currently, the planning world has only one credible product available for your fiduciary toolkit. Some of you probably have a hazy memory of IPS AdvisorPro as that word processing template that Ibbotson would grudgingly show you if you knew enough to ask about it — a template which gave you enough sample text to customize investment policy statements for clients. That program has moved from Ibbotson back into the hands of its creators — Norm Boone of Mosaic Financial Advisors and Linda Lubitz of Lubitz Financial Group — and has been developed, over the past two years, from a template into a full-fledged web-based program. Apparently the work was not in vain; the program was named Best Software of 2006 by software reviewer and Virtual Office News co-editor Joel Bruckenstein.
To use the program, you first want to create your own personalized templates — which, of course, will be different for different types of clients. After you log onto the web site, the setup wizard lets you decide which paragraphs of the pre-written sections of text should be included in the IPS for any of eight different types of clients. For instance, you can print out the first section, entitled “Investment Policy Discussion,” and decide if you want to include this section, and if so, for which types of clients: individual clients; trusts; charitable trusts; endowments or foundations; life insurance policies; pension plans; profit sharing plans; or self-directed 401(k) plan.
Since this is a generic part of the IPS, you probably want to include it. Then you can go through and decide which paragraphs will be included in each client’s template IPS, check a box, and only those selected sections, and selected paragraphs from those sections, will appear when you call up the template for, say, the individual client or the charitable trust. For the individual, the trust, charitable trust and life insurance policy templates, you might want to leave out the section that discusses ERISA, since none of those client types is covered by the provisions of the ERISA statutes. The discussion of the Uniform Prudent Investment Act would be appropriate for the trusts, charitable trusts, endowments and foundations.
Next, you modify the language of the individual paragraphs so that they are more to your liking. If you already have an IPS that you wrote for a client, or a sample document from a planner you met at a conference, you can cut and paste directly into IPS AdvisorPro’s online template, and generally edit the content as if you were in Microsoft Word. (If you work with a broker-dealer, then the compliance officer will have built-in controls over what you can and cannot modify. And you can put restrictions on what your staff can rewrite, add or delete.)
Once you have the discussion parts of the document customized to your liking, you turn to the heart of the program, which is the recommended investment portfolios. IPS AdvisorPro comes with 29 built-in asset classes, and you get annual updated performance information on each of them. (You can also create your own asset classes and sub-asset classes, but then you have to provide your own historic returns, standard deviation and annual returns data.) You build your template allocation models for each type of client, name the models, specify the percentages and the program automatically calculates the portfolio’s expected risk and return statistics.
Are you stuck with that language, and that asset allocation for every client of this type? No. Once you save the template on IPS AdvisorPro’s web site, you can then pull it up for an individual client, have the client fill out an online questionnaire (as a practical matter, you’ll probably print out the questionnaire, get the information and fill it out online, and then call up the appropriate template and have it populated with the information from the questionnaire–including the name of the client, beneficiaries and other relevant information. While there, you would further customize the IPS to the individual client (creating a customized asset allocation and any customized wording you want to insert), and save it under the client’s name. If you want to increase the cash allocation for this client from 2% to 5%, or raise international exposure, then the system accommodates fully individualized portfolios.
Print it out, look it over, and voila! Download a PDF file to your hard drive and you have your first client’s IPS.
The point, of course, is to get as much done generically as possible, and then provide less labor-intensive tweaks when it comes time to produce the actual documents for your client base. Boone and Lubitz have been creating and thinking about IPSs for about as long as advisors have been managing portfolios, so their language is in danger of becoming the market standard. The program also comes with an online risk tolerance questionnaire (a future upgrade will link IPS AdvisorPro to the FinaMetrica RTQ system); there’s online and 800-number help and online “best practices” advice at various steps along the way, and you can put your company logo on the documents through the server.
Cost? $495 for the first 100 investment policy statements in any 12-month period. If started in January and you do your 101st IPS in, say, August, then you would be billed $495 for the next 100, through the following August. (Yes, there’s a $395 version, but the fact that you only get a summary page makes it not really appropriate for professionals.)
I’ve said before that the planning profession needs to prepare for a fiduciary future, which means getting in the habit of living by more stringent standards of practice. Having every client go through the risk tolerance assessment process (FinaMetrica is the current standard); having an IPS for every client; and having a defensible process for selecting investments (The Center for Fiduciary Studies has created the most credible guidelines) would get your practice one step ahead of any fiduciary guidelines that are likely to come from the regulatory bodies.
Yes, this is all about consumer protection. But I can’t help but enjoy the possible competitive advantage you would be at if the best advisors staked out this high ground in advance.
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