Is the IPS just ammunition for a lawsuit?
Posted by Norm Boone on September 15, 2014
Having a written investment policy statement just makes it easier for my clients to sue you. You've probably heard that argument before, right? But that's only true if you are either unwilling or unable to follow what's in the IPS. And that should never happen.
An IPS is a written agreement between you and your client about how the client's money is to be managed. In most cases, you (the advisor) are the one who writes the IPS, with the client's input. In cases where you are not directly involved in drafting the IPS, it is imperative that you read and agree to the existing document before accepting an engagement. If something is in the document that you don't agree with or may not be able to deliver upon, don't agree to it. Both you and the client should sign the finished IPS, indicating that you each agree with it and accept it.
ONLY INCLUDE WHAT IS TRUE
If you are writing the IPS document, it should exactly reflect your procedures and philosophies. These are things that you probably do consistently for all your clients. If something changes about your processes or how you manage money, then you have an obligation to explain those changes to clients before you actually make the switch. As part of that process, you should get an additional client signature, indicating their understanding and acceptance of the change. If clients don't agree, it's better to learn that up front than after the fact.
Furthermore, you should never include in your IPS statements that which you a) know you won't actually do or b) aren't sure you will do. There is no requirement that any particular bit of information needs to be in an IPS. If you can't be sure you will be doing exactly what the IPS is committing you to do, then you should not include it in your IPS.
If you only have in your IPS those things that you are prepared to do and you actually do them, then the IPS should never be grounds for a lawsuit. In fact, it should help protect you by being a mutually agreed upon game plan for the investment policy.
WHAT TO DO WHEN CLIENTS WANT TO GO OFF SCRIPT
Having client requests documented in a signed IPS is another way it helps protect the advisor. Let's say that a client wants to exclude potentially important parts of a well designed portfolio (e.g., implementing small stocks or short-term bonds), or perhaps he wants to include elements that could be harmful, like having 50% of the portfolio in his employer's stock. If advising against the request isn't enough, having that request documented in a signed IPS will mean that the client can't later blame the advisor for doing what the client himself had insisted, as documented in the IPS. The IPS serves as institutional memory that helps avoid that occasional problem.
If you do what the IPS said you were going to do (and that should always be the case), and the client has signed off already accepting that approach, then it would be a highly unusual situation for a court to even entertain a client complaint about an adviser doing something the client had already agreed to.
If you don't do what you say you will do, then perhaps you ought to be sued. But, if you carefully follow your own procedures and have explained those processes to your client, having all that documented will only help you.
