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Customized IPS
Investors should ask for an Investment
Policy Statement
One way to increase the chances
of a profitable and harmonious relationship with your
financial advisor is to have an Investment Policy Statement
(IPS) in place. An IPS is a document which sets out
how the account will be managed, the type of investments
that will be used, how performance will be measured,
the fees that will be charged, etc.
With an IPS you and your advisor are both clear on your
goals, the strategy to achieve them, and the yardstick
for measuring success. With this tool you can discuss
the performance of your investment portfolio calmly
and rationally. There will be no need for argument or
debate when it comes time to evaluate performance. The
IPS is a guide that clearly shows whether or not your
portfolio has performed within the expected range of
returns.
A custom-prepared, client-centred IPS is quite different
from a “boilerplate” IPS designed to protect
the investment firm and to satisfy the industry’s
injunction to advisors to know their clients. The boilerplate
IPS is often written in language that makes it difficult
for clients to measure performance against the established
benchmark.
The following is an example of some of the information
that would be contained in a client-centred Investment
Policy Statement:
Purpose
The purpose of the investment policy statement is to
set out in clear terms the client’s objectives
and the objectives for the portfolio as a whole. Information
will include:
- The expected long term average rate of return
target for the investment portfolio.
- The expected range of returns for the
portfolio as a whole over different time periods,
e.g., for any one-year period, the range between the
best likely result and the worst likely result.
- A description of the different asset classes that
will be used, a long term or strategic asset mix as
well as the permissible ranges for each asset class.
- The benchmark that will be used to compare actual
performance for individual asset classes and for the
portfolio as a whole.
- Investment constraints, if any have been imposed
by the client.
- The overall investment strategy as well as the rebalancing
strategy.
- All fees that will be charged and all fees that
will be earned by the advisor.
- Assumptions used for inflation, rates of return,
correlation and standard deviation.
The IPS should outline the duties
and responsibilities of the Investment Advisor
For example the duties of the Investment Advisor might
include the following:
The Advisor will be responsible for
guiding the client through a disciplined and rigorous
investment process. As a fiduciary to the Client,
the primary responsibilities of the Advisor are
to:
- Prepare and maintain an investment policy
statement.
- Provide sufficient asset classes with different
expected return/volatility profiles so that
the Client can prudently diversify the portfolio.
- Prudently select investment options for the
Client's consideration.
- Control and account for all investment expenses.
- Monitor and supervise all service vendors
and investment options.
- Monitor the portfolio's asset allocation and
rebalance the portfolio in accordance with the
Client's instructions.
- Avoid prohibited transactions and conflicts
of interest.
It is easy to find excellent examples of Investment
Policy Statements. Some examples of websites which illustrate
Investment Policy Statements are show below:
http://www.pksadvisors.com/PolicyStatement.asp
http://www.401khelpcenter.com/401k/IPS.html
http://toolsformoney.com/investment_policy_statement.htm
http://www.fpanet.org/journal/articles/2003_Issues/jfp0503-art8.cfm
Recommendation:
Ask your financial advisor for an Investment Policy
Statement.