What's in an investment policy statement?
Posted by Norm Boone on September 29, 2014
You already understand that having an investment policy statement is good for you and your clients and, generally speaking, know what the IPS is supposed to do. But do you sometimes struggle deciding what, exactly, you should be putting into your client IPSs?
At its core, an IPS is a document that reflects what a client and advisor have agreed to regarding how the money is to be managed. To consider what should go into an IPS, imagine what you and your client need to know about what the other is doing. Those are the topics that need to be documented. A good IPS should help each party clearly understand the other's expectations and should therefore help to avoid surprises.
WHAT YOUR CLIENT NEEDS TO KNOW ABOUT THE INVESTMENTS
Put yourself into your client's shoes. What would you want to be sure you understood about what the advisor is doing? What might you be surprised to learn about how the investments are being managed?
- Are we investing in individual securities or in mutual funds?
- Is the advisor going to be making every decision, or will someone else (e.g. a separate account manager) be involved?
- Will you be timing the market, or sticking to your "guns" when the markets are changing?
- What allocation will my portfolio reflect? On what basis are you making that decision?
- Will you notify me before you make trades? When you change my allocation?
- How much money will I be generating from my investments and how will it come to me?
- Will you vote my proxy statements for me?
- Do I have any responsibilities as the client to make this relationship work?
- How often will we meet?
- How will I get information about my investments? What format will that take?
WHAT YOU NEED TO KNOW ABOUT YOUR CLIENT
From your perspective, the IPS needs to include critical information about the client and the client's preferences. That information also needs to be updated as the client's circumstances evolve or change. For example:
- How much money do you want from this portfolio and how often?
- How aggressive are you willing to be in your investments?
- What other assets or liabilities do you have that should be taken into consideration as we design your portfolio?
- Will more money be coming into this portfolio? If so, what's that look like?
- Is there anything in particular that you want to include or exclude in your investments?
- Do you want exposure to investments that are guided by socially responsible considerations?
- What is your tax situation? Should that be a consideration in making investment decisions?
AN OUTLINE FOR THE IPS
More than anything else, the IPS is a communications tool, helping both the client and the adviser be sure they are clearly understanding the other's desires and expectations. The IPS can (and, in our opinion, should) include the following sections:
- Opening positioning on what an IPS is and why it is important to this relationship
- Descriptive information about the client--ID, circumstances, and general outlook
- Investment objectives--what is needed from the portfolio
- Time horizon
- Tax considerations
- Risk tolerance
- Asset allocation
- Portfolio holdings (and exclusions)
- Specific client requests
- Investment management procedures to be followed
- Obligations and responsibilities of the party
- Meetings and investment reports
- Procedures for modifying the IPS
- Signatures and acceptance
