What is an investment policy statement and why create one? | Financial advisers

Financial advisers who work with high net worth individuals, family offices and institutions can improve their client services with the help of an investment policy statement. This formal document is not a legal agreement, but it is an essential tool that details how clients’ money will be managed.

The simplicity or complexity of the statement depends on the type of client, the needs of the family and the complexity of the investments. The statement is a long-term plan spanning 10 years or more, but advisors and clients can update it as circumstances and goals change.

Here’s what advisors should understand about investment policy statements:

The investment policy statement is the guiding document for a client’s investment portfolio, written with a set of guidelines designed to achieve certain goals, says Andy Hart, CEO of Delegate Advisors, a multifamily office.

He says clients who have multiple portfolios and complex investments need these statements so advisors know how to meet the goals of each individual portfolio. “Portfolios can have different purposes. Every client should have an investment policy statement, but sometimes they don’t want to bother putting one together, ”he says.

For example, if an advisor invests money in trusts for children ages 3 to 5 and also invests money for parents’ retirement, those are different goals. With an investment policy statement, “you know that the wallet you invest in for the kids has a very long period of time before cash is needed, while for the parents they might need it in the cash. 10 years, ”says Hart.

Kevin Swanson, CEO of Potentia Wealth, also sees the investment policy statement as an opportunity to plan a legacy for generations, explaining how the family got rich and how to manage it. It goes beyond simple financial planning, he adds.

“This is a unique opportunity to come together to shape the future of the family, to create a value statement about how they would like their wealth to impact the lives of their family and the world,” said Swanson.

Michael Zeuner, managing partner at WE Family Offices, agrees, adding that when counselors create these plans, they should spend time on the compilation process. “If this is just a tick-off exercise, you are really missing the nuance and importance of the conversation,” he says.

During these early conversations, advisers should ask what clients hope to accomplish, what cash flow they need for their lifestyle, and how important it is to pass on wealth to younger generations, experts say. Beyond that, Zeuner asks questions related to behavioral finance to gauge clients’ understanding of positive and negative investment experiences. This allows him to dig into the quantitative and qualitative factors that define clients as investors and their definition of success.

An outline of the financial planning portion of the policy statement may contain the following:

Swanson says that once he knows the family’s financial goals and objectives, he adds investment management goals to the plan. These include the type of risk the manager will take and what that means in terms of expected returns and timing. This portion would also specify whether the family wishes to invest according to religious beliefs or socially responsible investment criteria.

The asset allocation section can be as detailed or as basic as the client wants, depending on the sources. The key is to understand their level of tolerance. Hart says that for some portfolios he details specific asset classes and how these are allocated across the portfolio. For other portfolios, it can simply quantify the functional function of the assets in the portfolio.

Swanson says families may be less interested in the granular details of specific investments. Their main concern is usually overall performance and provisions for their family and future generations. They also want the money to be managed in a tax-efficient manner and eventually leave a legacy.

Hart and Swanson say the policies include information on when clients can expect performance updates and how the portfolio is being managed. Swanson says he also includes a section on the process for removing investment managers, including himself, if the client is unhappy with the performance.

The statement covers long-term financial planning goals and covers clients’ cash flow needs as needed. Short-term liquidity needs are usually addressed first since they are short-term. Hart recommends setting this period at three years, so clients do not need to operate longer-term assets during market downturns.

Since the policy statement is a conversation between the advisor and the client, both parties should also review it and modify it periodically if circumstances change. In addition to scheduled recordings, advisers should be alert to changes in clients’ cash flow needs. These could include buying a second home or providing financial assistance to another family member.

“You go back to the IPS and say, ‘Oh, does that change (your cash requirements) under the IPS that we are using as a doctrine to manage this portfolio? ”Said Hart. “You are responsible for listening to their goals change, but you have to let the client know that they are part of the conversation. It is not a one-sided thing. “

Zeuner says one of his clients wrote a statement in fall 2019 with certain assumptions for lifestyle expenses and sources of income, including a certain percentage of withdrawals. He says that in 2020 and 2021, the client, a married couple, did not make any withdrawals. This sparked a conversation with the client about the changes in his financial life.

The couple told Zeuner their spending needs were lower than expected after selling a business. After a detailed discussion, he was able to modify their policy statement to take more risk and greater growth.

“I think it’s up to the counselor to look at what he sees in real life with the family. Is that what we thought or is it different?” he says. “And then, how can I change the investment policy statement because of what I actually see as client behavior? “