Is an IPS an invitation to lawsuits?
Posted by Norman M. Boone, MBA, CFP®, Founder & President, Mosaic Financial Partners, Inc. on September 21, 2015
Some “experts” claim the less you give to your client in writing, the better. It minimizes the chance of a lawsuit. If you didn’t ever say you would do something, then you can’t be sued for doing it, or not doing it. With that in mind, either don’t do an IPS for your clients or make it very, very short.
It is the wrong way to look at things.
Having an Investment Policy Statement is all about trust and disclosure; it’s about transparency. It is a manifestation of the kind of relationship you want with your client. If you want to be a trusted advisor, then your client needs to know what to expect from you and then be able to trust that you will do it. The more the client knows what they are going to get from you and the more they know that you understand them, the more comfortable the relationship between the two of you is going to be.
If an open, trusting relationship is what you want with clients, then an IPS can help you get there. It shows that you understand your client, that when your client tells you their goals, or that they want or don’t want something in their investment portfolio (e.g. social responsible investments, or junk bonds, respectively) you have heard them and are willing to commit to reflecting that in your investment approach for them.
There shouldn’t be any surprises between you and your client about the things that are under your control….you can’t control the directions of the market or whether a particular investment goes up or down; you can control what you invest in, the asset allocation, your selection process, when and how you rebalance, etc.
Except for large institutional clients, as the advisor, you will almost always be the author of the IPS. You get to choose what to say and not say. You are in full control of the promises you are willing to make and those you are not willing to make. Your IPS should never say you will do something (e.g. rebalance in a particular manner) if you aren’t sure you will do it. Promise what you can be certain you will deliver. Don’t promise what you may not deliver. If you are pretty sure but not certain, then give yourself an “out” by saying “you will make best efforts” or that you will “generally” do it, without committing to always do it. If your practices have changed, then amend your IPS so that it will reflect your new practices. Keep your clients informed about what they can expect from you.
Doctors with a good bedside manner, someone who builds trust with patients by seeming to care about the patient, have dramatically lower rates of lawsuits than doctors who spend less time and treat their patients more at arm’s length. The same is true for financial advisors. If you clearly put your clients’ interest first and you do so in ways that show that you care about the client and respect their sensibilities, it’s unlikely that you will ever face a lawsuit.
If you are careful to be as disclosing as possible in your IPS about how you are going to manage that client’s money and yet only promising what you are certain you will deliver, it’s highly unlikely that you will ever be on the wrong side of a lawsuit. Far more likely, using a well-written IPS on a consistent basis is likely to protect you in that rare case that you are sued.
A good IPS not only helps to set the stage for a positive and trusting relationship with your clients, it acts as a prophylactic against lawsuits. The only time the IPS can work against you is when you have promised what you don’t deliver. If you don’t do that, you have nothing to worry about.
Click below to see how you can easily generate an IPS for clients in the fi360 Toolkit.
