Drawing up investment policy statements and letters of engagement is just plain good business practice. These records can prevent miscommunication and confusion on the part of either advisor or client. Yet not all advisors are using them and none of the firms require them. A number of firms are, however, providing software that makes developing policy statements easier.
Rick Johnson, director of practice advisory services at Toronto-based Advocis, says financial planners who do not use them are “working without a net,” because without them there is no record of what the client’s or the advisor’s expectations are.
In this year’s Planners’ Report Card survey, Investment Executive asked planners for the first time to comment on their use of investment policy statements and letters of engagement. Although almost two-thirds of all respondents say they provide their clients with investment policy statements, only one-third report using letters of engagement.
> Policy statements. Investment policy statements can be as simple as a one-page document outlining an investor’s financial situation, objectives and risk tolerance, and letting a client know how often the advisor will meet with him or her, and how the advisor will be compensated.
Several firms say their advisors have been using investment policy statements for some time and recognize their importance. But, to date, no firms have made them a requirement.
“It’s not a standard that our advisors use them, although most do. They are important,” says Stephen Cole, regional vice president of sales in Toronto for Montreal-based Laurentian Financial Services. “I don’t think we’re that far away from having them regulated.”
Scott Sinclair, president and CEO of Toronto-based Money Concepts (Canada) Ltd. and Aegon Dealer Services Canada Inc., agrees: “They’re not a requirement, but we encourage the use of them.”
Some firms have started integrating software and training guides to help advisors create investment policy statements for clients. “We are coming out with a significant software program around the use of investment policy statements. It’s in testing right now,” says Don Charter, executive vice president of Dundee Wealth Management Inc.
Investment Planning Counsel of Canada Ltd. in Mississauga, Ont., the financial planning unit of IPC Financial Network Inc., began offering this service in 1999, and its investment policy statements are now available electronically. “They are built into our system. They’re easy to do,” president Chris Reynolds says. “It’s difficult to make mandatory, but I’d say a large percentage of our advisors use investment policy statements because we’ve systemized it so much.”
Geoffrey Charlton, executive vice president of Burlington, Ont.-based Berkshire Investment Group Inc., says these statements are useful and Berkshire plans to roll out investment policy statement software in the future. The firm wants to make it easy for advisors to create the documents.
> letters of engagement. Many advisors seemed confused by what letters of engagement are, perhaps because management at their firms is not promoting them.
Letters of engagement, says Advocis’s Johnson, “are the deal before the deal. A letter of engagement simply says: ‘Here are the rules of our relationship, here’s what you can expect from me, here’s what I can expect from you and, if either one of us falls short, the other has a right to terminate the relationship’.”
Advocis recently published its Best Practices Manual, with sections dedicated to both letters of engagement and investment policy statements containing tips on how to create these documents.
The best practices principle maintains there should be a written statement for every client situation. The agreement can outline a number of areas, such as services being offered, responsibilities of all parties, method of advisor compensation and how to terminate the agreement. Letter of engagement samples in the manual were developed by a financial advisor, Johnson notes.
“He held his clients equally as accountable as they were holding him,” Johnson adds. “A letter of engagement defines what holds both parties accountable when it comes to the exchange of advice.”
David Vowles, president and CEO of FundEx Investments Inc., based in Markham, Ont., agrees these letters are essential. “They are an important component of best practices because they establish and document the agreement between the advisor and the investor prior to taking any investment action. It’s that critical piece up front that says: ‘Here’s where we’re going; here’s what your objectives are’.”
Johnson believes the use of engagement letters will increase as more clients resort to litigation when investment expectations are not met: “It’s a document that ensures both parties keep to the original deal. A letter of engagement is sound business practice.” IE