Whose IPS is it, anyway? [Hint: not yours]

Posted by Norman M. Boone, CFP® on October 16, 2014

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One of the best characteristics of an investment policy statement is that it is collaborative. It documents the agreements and understandings both the advisor and the investor have agreed to in order to avoid surprises (e.g., “we’ll invest 60% of your portfolio in stocks and the rest in bonds” or “we’ll make every reasonable effort to avoid holding banking stocks in your portfolio, since you work for a bank”). 

Without documentation, it becomes easy for a client to forget what the advisor said about rebalancing procedures, or that the client specifically requested avoiding high yield bonds.  Having the agreements and understandings in writing protects everyone and helps ensure that the relationship continues to serve both sides well and that everyone is happy. But that begs the question: “To whom does the IPS belong?” 

IT’S THE CLIENT’S IPS
 

Over the past 27 years of working with clients, I have come to understand that it is in everyone’s best interests if both parties treat the preparation and use of the IPS as if it belonged to the client, not to the advisor.  Here’s why:

• If it is the client’s, then it is unique and will tend to get treated that way.  The advisor has many clients, but the client probably only has one advisor being guided by the IPS.
• If it is the client’s, then the client will treat it seriously and willingly take an active role in developing what it says.  This is important for a few reasons.  If the purpose is to get everything out on the table, then the discussion required to write up the policies tends to be very different than if it is simply a form to be signed and put in a box some place.
• If the client understands that the advisor is really going to follow the IPS, manifesting a desire to put the client’s interests first, then what goes into that document is going to be important to that client.  The guidance that is going to be followed by the advisor needs to be thoughtfully developed, so that the advisor will do what the client wants and expects. When misalignments arise between the client’s wishes and the advisor’s procedures, talking it out helps build the relationship.
• If the advisor owns the IPS, rather than the client, then the tendency on the part of both the advisor and the client will be for it to be treated like just another form.  It loses its meaning and importance for the client, and so the work that should go into thinking deeply about what is really wanted seems no longer necessary.

Treating the IPS as a client-owned document results in it being taken seriously by both the advisor and the client and ultimately results in a better outcome for both.