Making the Investment Policy Statement Part of Your Investment Process
Norm Boone, MBA, CFP®
By Norm Boone, Published by Legent Clearing 2007.
More and more advisors who manage money for their clients are discovering the value and the importance of using an Investment Policy Statement as a key part of their investment process. They arc finding that 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.
An Investment Policy Statement (“IPS”) is a written document that provides a record of the agreements reached between the client and the advisor with regards to the policies and procedures to be followed by the advisor in managing the client’s money. Such a document 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 considered a “best practice” for advisors.
The most frequent question we hear is: “How do I do it?” What follows reflects our suggested approach to investment management-it is what we do in our own advisory practices.
We believe that the creation and confirmation of the IPS is the Single most important step in the investment process, because all the other steps either lead into the IPS, or are directed by it.
The Investment process can be seen as occurring in six steps shown in the adjacent graph. All centered around the development and continued use of the IPS:
Initial Discovery – We learn about the client’s circumstances, goals, income needs, restrictions, current holdings, risk tolerance, etc.
Discussion and Agreement – W talk with clients about the various issues and choices that must be agreed to before we can appropriately manage their money. This gives us an opportunity to educate, to set appropriate expectations, and to find agreement on issues like the degree of client involvement the asset allocation to be used, the kinds of instruments we’ll be
Investing in (or not), our approach to taxes, dollar cost averaging and a host of other
Implementation concerns.
Creating the IPS – Once we have agreement on the full list of issues (systematized through a questionnaire to help 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 signifying its acknowledgement of our agreements.
Investment Implementation – We do no trades in the client’s accounts until we have an IPS in place. Once the IPS has been agreed to by all parties, we are then free to do all the initial and on-going trades according to the “road-nap” provided by the IPS.
Ongoing Communication – Our regular meetings, phone calls, emails and periodic reports are all conducted as called for in the IPS.
Monitor & Adjust – No portfolio stays as is. So, as laid out in the IPS, we monitor the portfolio for poor performers, for rebalancing opportunities, for tax loss harvesting and other ways to keep the portfolio in line with the objectives set forth in the IPS.
Clients and their needs change over time. It is therefore important to periodically go back to step one, to make sure you are addressing the client’s current needs and wishes and not ones that are now out of date. Every one to two years, the IPS document should be reviewed with the client, to make sure that they continue to agree with its provisions. This offers an opportunity to remind clients about all the things you do to make sure the client’s portfolio continues to serve their needs and it helps remind them of your philosophy and approach: all of which helps to avoid surprises and disappointments. If you do what a client expects you to do, then 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 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.
The other important benefit that accrues is that clients have a better understanding of what we are going to do with their money and of our approach. They understand we have a reason for each of the things we do or will be doing. As a result, they are more confident in our abilities and therefore much more wilting to release the controls. We each take full discretion to manage our clients’ accounts. This can only happen if you have established comfort on the part of the client in your abilities and approach. Working through the creation of the IPS and its prior steps forms the basis for that confidence. It makes our lives much easier.
If the markets go through a down period, if the clients have confidence in you, they won’t be calling to ask you to move their accounts to more safety. 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 show our seriousness about the requested changes by insisting the policy statement itself be changed, clients realize the seriousness of their request. The IPS serves clients well by providing a framework to help them think about investment decisions, allowing them to get through difficult market periods. Doing so obviously makes the advisor’s life easier as well.
IPS AdvisorPro™ is new software (recently named “Best Software of 2006″ by Morningstar’s Technology Editor Joel Bruckenstein), now available to advisors who want to use Investment Policy Statements in their practices. The online application is fully customizable (the words, the asset classes and the asset allocation models) by each advisor so that the final document will reflect his or her unique practice. To create an IPS, the advisor simply completes a questionnaire about the client, selects the asset allocation model to be utilized for that client, makes any final adjustments to the words and the IPS is ready to print and save. The IPS remains on the system until the advisor returns to modify it or do an annual update. The highest available security systems assure complete confidentiality of the data. If you are interested in learning more, see www.IPSAdvisorPro.com for tools and resources.
A PDF version of this article can be downloaded here.
Legent Clearing © 2007 – http://legentclearing.com/
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