Imagine yourself IN the future meeting a potential buyer of your practice and standing by while one of your staff members demonstrates the efficiency of your business by reviewing each client’s signed Investment Policy Statement and explaining who is responsible for what and who is accountable to whom under the terms of that IPS. Imagine how impressed the buyer would be with a presentation of such order, control, and predictability.
Many advisors have not recognized this invaluable function–writing investment policy statements for every client–as a business system. But the IPS process can help build a successful practice because the process can become mechanism for updating and retaining clients, and even attracting new clients. It can also help differentiate your business from other advisory practices in the minds of clients and potential buyers.
The IPS was developed originally by pension consultants who worked with qualified plans to protect their fiduciary clients from personal liability while also defining plan responsibilities and obligations. However, the simple premise on which it is based provides an IPS with the flexibility that enables it to be used with individual clients to help make difficult decisions easier. Since accountability and responsibility are defined in the statement, each step becomes a small component of the overall decision-making process.
There are other benefits to an IPS. It provides a framework for evaluating investment performance and aids in clear communication between advisor and client. Finally, it helps dispel the root causes of dysfunctional client/advisor relationships based on the old sales model of emotional transactional selling. A functional business model does not rely on psychological and emotional rationale to get someone to say yes.
Using the IPS as a business system ensures that advisors hold rational and logical client discussions and that those clients have acknowledged an investment decision-making process in writing, adding an extra layer of compliance protection to your firm or to you as the advisor. This process ensures that both the advisor and client are in sync and serves as a guideline for managing clients’ assets and expectations. When used properly, the IPS can be a practical tool that embodies the essence of the financial planning process.
The initial steps involve organizing and preparing for client meetings. At the first meeting, the advisor addresses the issue of accountability and the fact that it works both ways, and sets out the rules for working with clients. For existing clients, advisors can explain that they have added a management tool called an IPS and describe what it entails.
The basic presentation can be given in a one-on-one setting or conducted in a client workshop format; either format is effective. If you decide to follow the workshop approach, team up with someone on your wealth management team.
You should view every meeting as an opportunity to uncover additional client needs and provide additional services to build client satisfaction. Satisfied clients talk to their friends and associates, and that translates to referrals.
The second or third meeting is designed to actually create the “policy.” To accomplish this, a full review of all relevant information is required including risk profiles and tolerances, tax situation, past or future investment biases, and goal identification. This review typically includes income tax returns for the previous two years, recent financial statements, bank statements, mutual fund statements, brokerage statements, life insurance policies, employee benefit statements, wills, and trusts.
Be sure to make it clear to your clients that you are collecting this information to create an effective IPS tailored to their particular needs, objectives, and values. Clarify that an IPS does not replace a financial plan but is an additional tool.
The advisor’s next job is to draft an IPS that communicates the essence of the relationship with the client in terms of investment management and expectations. The IPS is then reviewed with the client, and once agreement is reached, both parties sign the document, thereby acknowledging the terms of the relationship and how the portfolio is to be structured and managed.
Further meetings may be quarterly or ongoing, but you should review clients’ financial circumstances and investment needs regularly and specifically, anytime there is a major life event such as a birth, adoption, or change of employment status to determine whether the event warrants a change to the investment policy. This is particularly important as clients get closer to retirement and begin to contemplate distribution options from pension and profit-sharing plans, 401(k) plans, IRAs, 403(b) plans, or other arrangements.
Writing the IPS
The actual drafting of the IPS entails correctly capturing the key aspects of the relationship, as well as identifying who does what. It also entails making sure there is true agreement on the key components of the investment management process. Obviously, this step is critically important since the end result is the governing document itself. The actual document is composed of nine distinct steps:
1: Outline duties, responsibilities, goals, and objectives
In this step, a broad introductory statement that summarizes client information, needs, objectives, and goals is drafted; in essence this is the bare essentials of the relationships between the parties to the agreement.
2: Explain the strategy for managing risk
Today’s investment strategy is not about the avoidance of risk but the prudent management of risk. If client shortfalls are uncovered or needs change, methods for managing risk may also need to change. Risk management should include a consideration of all hazards that may follow from inflation, volatility of price and yield, lack of liquidity, and other “non-investment-specific” risks. These other considerations should be documented in this section of the IPS.