Investment advisors should have a policy whereby they obtain (and maintain) sufficient information regarding the client’s circumstances so as to demonstrate that the firm managed the client’s assets consistent with that client’s designated investment objectives and any corresponding restrictions. How does the firm accomplish this? Is the answer an investment policy statement?
No! At least not in the manner that most advisors think of an investment policy statement (IPS), which all too often is: much too long; much too complicated; and a much too clumsy dissertation of various investment-related information and historical data that serves more to confuse than to enlighten the client.
Such a comprehensive formal process is also most likely very time consuming, and a major reason why too many advisors do not properly document client investment suitability parameters, either initially or on an ongoing basis.
Moreover, such documents are too-often forgotten relative to acknowledging amendments to the document resulting from changes in the client’s financial situation or investment objectives subsequent to the commencement of the investment management process.
Yes, But . . .
Some type of investment policy statement should be obtained and maintained by an investment advisor. However, longer does not mean better!
Too many times, especially when defending advisory firms in litigation or arbitration proceedings, we see advisors falling victim to their own sloppy documents (a “canned” questionnaire or ambiguous form that is a minefield for conflicting responses). If the client indicates on page 2 of the IPS that his objective is a 10% annual return, but on page 5 (which is clearly, in my opinion, already too long a document) that he can only tolerate a principal loss of 5%, we have a conflict, such that the advisor, as a “fiduciary,” should not begin the investment management process until the client’s objectives and risk parameters are consistent, and written confirmation thereof has been obtained.
Moreover, a new client’s response on a canned questionnaire in 2005 that she could only withstand a 10% decline was long forgotten during the 2008 plunge when her account plunged by a multiple of that number! Why even have such questions on a questionnaire!