Posted by Norman M. Boone, CFP® on May 14, 2015
Congratulations. You have a new client. Or, at least that new prospect has agreed to become a client. But when do they actually cross that threshold that makes them a “formal” client that anyone looking from the outside would agree that they are now your client?
In my firm, Mosaic Financial Partners, four things need to happen before we consider someone an investment client of our firm, all of which happen roughly concurrently:
* * * * *
- They sign our Letter of Engagement (our contract). This sets out all of the legal aspects of our new relationship, including our fee schedule and the fact that we will be taking discretion on the account, and what that means. This agreement is the same for every client.
- The new account paperwork for each of the accounts that we will be managing is complete. This includes our right to trade in the account, our right to access any and all information about the account, and our right to deduct our management fees from the account. If the client already has some or all of their accounts at the custodian we will be using, then we don’t have to transfer the accounts from someplace else and we may just need a Limited Power of Attorney completed to give us those required rights on those accounts. If the account is a 401(k) or something similar that we’ll be managing outside of our normal custodial relationship, then we use an account aggregator to get access to that account, and we’ll need that paperwork signed as well.
- The accounts are funded. If the money is being moved from one place to another, to the new custodian, we need to have funds to manage before this is really a client. As a general rule, because the next step takes some time, we don’t consider the account(s) fully funded unless most or all of the money that will be transferred into that account has arrived.
- The investment policy statement (IPS) is completed and signed by both us and the client. We need the IPS finalized before we consider this a client relationship precisely because the IPS outlines the agreements between us and the client as to what is going to be done with the client’s money. This is where we document the client’s goals, their risk tolerance, what we’ll be investing in (and not investing in), what the asset allocation of their portfolio will be, when and how we’ll do re-balancing, how and when we’ll be reporting back to the client about performance, how often we’ll be meeting, when we’ll next review and update the IPS, who will be voting the proxy statements, etc. We want all that in writing and to be clear that we and the client are on the same page BEFORE we start managing the money. Our IPSs have some similarities from one client to the next, because our procedures are consistent across clients, but how we implement those procedures varies from client to client, so each IPS is unique to each client. Getting the IPS done takes 1-2 meetings, a couple of questionnaires for clients to complete and plenty of discussion, but we want to make sure up front, that we and the client are on the same page about how their money will be managed before we are in full agreement that this is a formalized client relationship. It helps ensure that this is a long-term client.
Editor's note: Norm Boone is the founder of IPS AdvisorPro, now a product of fi360. He is a regular contributor to the blog, typically addressing ways to build, maintain, and implement an effective investment policy statement. In fi360's training programs, we refer to the IPS as the most important part of managing the fiduciary relationship. You can view sample IPS documents for 401(k) plans and individual clients.