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Template for Success: Investment Policy Statements

Advisors don't need to start from scratch every time they need to create an IPS.

Helen Modly, 10/05/2006

Do you have an effective investment presentation that you can easily customize for any prospect? Does it position you as an investment professional who has considered the unique circumstances of your prospect or is it a canned sales proposal? Consider developing a template for an Investment Policy Statement. A well-written IPS can serve as an effective tool to present your firm's investment philosophy and competitive advantages in a very professional manner.

Three Primary Objectives for Your IPS
The primary purpose of an IPS is to identify the investment considerations applicable to an individual prospect and articulate how you, the advisor, plan to address them. A carefully designed IPS can be a versatile tool in the investment process.  While each client will have unique investment considerations, you should have a standardized process to develop your recommendations. This will enable you to design a basic template for your IPS that you can customize for each new client based upon their needs.

Before creating the format for your IPS, consider what you want the document to accomplish. The three most important objectives are:

  • Identify this prospect's unique issues and considerations that shaped your investment recommendations.
  • Communicate your investment philosophy and management style and demonstrate how this will benefit the prospect.
  • Articulate your specific plan for managing this prospect's assets.

How to Begin
Many prospective clients have never heard of an Investment Policy Statement, so your first section should be a brief explanation of why you created it in the first place. This is your opportunity to display that you are not a salesperson trying to "win" their account, but a professional who uses a disciplined, effective process to design an appropriate strategy just for them.

Your introduction should discuss the basic investment process you use such as assessing their current situation, setting objectives, developing a strategy, and identifying the standards for ongoing portfolio monitoring.  This is a good place to include a brief overview of this prospect's current situation and primary planning objectives in a narrative form. One or two paragraphs is usually all it takes to demonstrate that you know your prospect and understand their unique needs.

What to Include
The particular items you include in the body of your IPS will vary from firm to firm and will be determined by your overall philosophy of investment management, as well as how you implement your recommendations. Some typical areas to address are:

Assets to Be Covered under this IPS
List the accounts that are to be included and any assets to be specifically excluded. We use an embedded chart in our Word document to fill in the account types and amounts for each prospect.

Description of Overall Portfolio Objectives
List the specific objectives that this portfolio will attempt to meet such as known withdrawals, contingency reserve needs, expected rates of return, tax efficiency, and diversification or other broad investment goals. We have several standardized objectives that we can quickly customize for any given prospect.

Cash Flow Considerations
List any known withdrawals or planned contributions to the portfolio or state that none are planned.

Discussion of Risk Factors
This section could be a generic identification of the various risks associated with investing and a brief discussion of each. Our list includes inflation risk, interest rate risk, market risk, liquidity risk, non-diversification risk, and reinvestment risk. Each item has a two or three sentence describing the risk and how our investment philosophy addresses the risk for this client. This format allows you to easily adapt your discussion to include any unique risks that this prospect should address. A little editing and this section reads as if it was written for this client alone.

Investment Time Horizon
State the time horizon you are using to justify your recommendations. Many clients will mistakenly think that their retirement date is the end of their investment horizon. This is usually the date they will begin withdrawals, not the date their investment goals end.

Discuss the meaning of liquidity and how this portfolio will meet any unusual needs.

Tax Considerations
Identify your prospect's tax brackets and any other unique tax issues such as carry-over losses, AMT liability, gains from other sources, etc. Describe how your management activities increase tax efficiency though loss harvesting, low turnover or whatever strategies you employ. If these are tax-deferred accounts, just delete all the template language and state that they are tax-deferred.  

Asset Constraints
List any assets that can not be sold due to emotions or employer restrictions as well as any positions or asset classes that are to be avoided for any reason. 

Asset Allocation/Diversification
Assuming these concepts are a fundamental part of your investment strategy, discuss them here. We have a subsection that describes our recommended asset allocation for this particular client, the types of securities we would use to implement and our fees for managing the assets described here. 

Monitoring and Performance Reporting
Describe your ongoing management activities such as rebalancing, tax-loss harvesting, etc. If you provide periodic performance reporting, describe your methods and the reports they will receive.

Implementation Checklist
In clear terms, discuss the accounts that must be opened, and the process for transferring assets to implement this IPS. If there are any unusual requirements, mention them here.

Designing a Template
Microsoft Word contains many document templates, and most of these are probably already loaded on your computer. For Word 2003, open Word, go to File and then New and look at the sidebar that appears to the right of your screen. Select Templates on My Computer and look through the various types of templates available. More templates are available by selecting Templates on Office Online. We use the Elegant Report template for our IPS.

Open the template and insert your headings and subheadings into the appropriate sections, create your template verbiage as discussed above and save as a read-only document. We highlight the specific words or sections that we expect to customize in red to make editing easier. When you want to create a personalized IPS, open and save the document under a new name to protect your template master. Our finished IPS is usually six to eight pages long. This process allows us to make an effective investment presentation that highlights our capabilities in a very personal and professional manner. 

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