Let’s start this week’s blog with a little test.

Q. A financial plan is to a client’s future as an Investment Policy Statement is to what?

A. An RIA’s fiduciary obligation

B. Prudent management of a portfolio

C. Cornerstone of the portfolio management process

D. All of the above

If you said A, you were right….

If your answer was B, well, you were also right…..

Actually, C is correct also and ….. that makes D the right answer!

Okay, I have to have fun sometime. This week I’m continuing to develop my IPS. I started this process several months ago but it stalled. In the interim I looked into some software programs for this but did not find one that seemed to fit me and my practice. Most of the choices I looked at were 85% canned language and 15% my input. I just don’t believe that’s what an IPS should be. This type of IPS seems to be more of a convenience than a critical piece of portfolio management.

I love to read and learn. Last week I was in a book store and $95 later I left with a new book entitled, “Managing Investment Portfolios – A Dynamic Process.” It contains an abundance of useful information for money managers. It clearly spells out, in detail, the entire money management process, including a section on creating an IPS. First, investor constraints must be clearly understood. These include liquidity needs, time horizon, tax concerns, legal and regulatory factors, and unique circumstances. Another part of the IPS is an investor’s risk tolerance and risk ability. Risk tolerance is determined by a standard risk questionnaire and is different from risk ability. Whereas risk tolerance measures an investor’s willingness to assume risk, risk ability measures the amount of risk they should take. For example, if clients need to withdraw income from their portfolios in the near term, they should not assume much risk even though they may be willing to do so.

So that’s where I am at this point: constraints, risk tolerance, and risk ability. I have developed a questionnaire for each of these.

Using a semi-active management process (somewhere in between active and passive), the IPS will also include a minimum and maximum allocation for broad categories only. This will allow me to make tactical adjustments within each category.

I’ll keep you posted on the progress.