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- The Need for Thorough and Effective Policies and Procedures Whethere an advisor is SEC or state-registered, RIAs must revise their policies and procedures to address significant compliance problems occurring during the year, changes in business arrangements, and regulatory developments.
“It takes too much time; I’m afraid of lawsuits; I’m not sure how to get started.”
These are common objections to developing a solid investment policy statement that Linda Lubitz Boone and Norm Boone hear all the time—and they’re not buying it. They make a strong case for including a well-organized and thorough IPS at the outset of every client relationship.
The husband and wife financial advisory team that run IPS AdvisorPro delivered a presentation early Tuesday morning at the FSI One Voice Conference in San Diego that included the “must-have” items to include.
“Fundamentally, what we are trying to convey about investment policy statements is to explain what they are and why they are important,” Norm Boone said. “Broker-dealers rightly worry about getting sued, and they unfortunately view the IPS as giving clients a way to sue rather than as a way to protect against such suits.”
Specifically noting compliance expert and AdvisorOne contributor Tom Giachetti, Boone said Giachetti “always advises to say little as possible so as not to get sued.”
Boone believes the exact opposite.
“Yes, be careful what you promise, make sure you actually deliver what you promise and don’t include anything on which you can’t deliver,” he added. “But we see the IPS as a sort of insurance policy against being sued. It helps to avoid misunderstandings between the advisor and the client, sets a clear pathway to actions to be taken, sets out client and advisor responsibilities and gets the client to clearly commit to all that."
The "essence" of any IPS, he continued, is that it records the agreements between advisor and client, including those that are often left unspoken. From the client perspective, it’s valuable "because they then get clarity about what they will experience, thus eliminating a lot of the reasons why clients get angry," he said. "Avoiding misunderstandings is the largest part of avoiding lawsuits.”
The duo noted three steps in developing an effective IPS:
1) The initial questionnaire should accurately identify the client’s circumstances, investment objectives, risk tolerance, and all investment restrictions and preferences. Review of the questionnaire responses is a great time for the advisor to assess the client’s investment sophistication and to provide the client with capital markets education.
2) The draft IPS is the initial IPS version, including the recommended asset allocation. Any areas of concern or things that are unclear should be thoroughly addressed at this stage. Discuss any unreasonable expectations with the client and make any needed changes to the recommendations in the IPS.
“As advisors ourselves, we have both worked in the broker-dealer community and believe broker-dealers can help build trust with clients by encouraging advisors to use an IPS,” Norm Boone added. “Regulations almost universally require an IPS for ERISA plans and wherever a trustee is making decisions on behalf of someone else. If it is necessary for those clients, why wouldn’t it also be beneficial for your individual clients?”
As to how many advisors he believes are currently doing so, Boone noted that at seminars 20 years ago, he would ask the audience that very question. “Maybe three hands out of 400 would go up,” he said. “Today, it’s 90% or 95% of the room, but not every IPS is created equal. They have to be done right.”
Check out complete conference coverage at AdvisorOne’s FSI OneVoice 2013 enhanced landing page.