Insights from the experts in investment fiduciary responsibility.

An IPS is about Policy

Posted by Norman M. Boone, MBA, CFP®, Founder & President, Mosaic Financial Partners, Inc. on September 04, 2015

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It is not good practice to use your Investment Policy Statement to identify the specific stocks or bonds or funds you will recommend for your client’s portfolio.  Those are issues of implementation.  Those are choices that you will want to discuss with your client and perhaps put in writing, but they don’t belong in an IPS.

If your IPS indicates that you are going to hold GM or the Vanguard Total Stock Market Index fund, then every time you want to make a change, you will have to change your IPS.  While it’s important to have those discussions with your client, that diminishes the role of the IPS.

Among other things, the IPS should address the Asset Allocation you and your client have agreed upon.  It should identify the asset classes and types of securities that may or may not be included in the portfolio.  It might address when and how you will rebalance.  The IPS might address the selection criteria that will be utilized to select securities or to evaluate their performance and continued worthiness for the portfolio.

One way to think about this is: the IPS is largely about “how” and “why” and not about “what.”  What specific choices you are going to make about what goes into a client’s portfolio and what will not be included will inevitably change.  You don’t want to have change the IPS every time that happens.  The IPS should be broader and have longer term applicability. It needs to be flexible enough for you to be able to do whatever is needed and appropriate for that particular client at any time in the future, but specific enough to give the client a clear idea of how you are going to be managing that client’s money.  It’s about building trust and being transparent.  It’s should not be so specific that you can’t do what you need to do to serve your client in the best way possible.

The IPS should serve as a “road map” so that you and your client share the same vision of where you are trying to go and how you are going to get there.  It does not need to limit your choices as to which gas station you’ll use, where you will stop for lunch and which lane you are going to drive in.  Avoid identifying in your IPS the individual securities you expect to use.  That may change.  Talk about asset classes (e.g. large cap U.S. stocks or California muni bonds) you may want to have exposure to or the kind of securities (e.g. ETFs or individual bonds), but not about the specific choices you might make within those categories.  Your choices will change; the categories you’ll want to choose from are likely to stay consistent.

Click below to see how you can easily generate an IPS for clients in the fi360 Toolkit.

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