Ensuring the client is on the same page

“An IPS serves as the cornerstone of communication between advisor and client,” says Brian Phillips, vice president of Phillips Hager & North Investment Management Ltd. in Vancouver. “It’s really just a clean and transparent way of creating an understanding.”

An IPS can keep the investor from straying from the plan and into the latest “hot” investment. The dreaded “keeping up with the Joneses” attitude that often overtakes common sense when market conditions heat up are, thankfully, kept at bay with an IPS, says Karen Smiley, vice president of practice management at AIM Funds Management Inc. in Toronto.

“If you have an investment policy statement, that is your beacon,” she says.

The document should precisely lay out the client’s objectives and the route the client expects to take to reach his or her goals, says Phillips. In doing so, it has the ability to weed out neutrally any misunderstandings before they take root, and is very similar to a financial plan. The five core steps of financial planning — clarifying the present situation; identifying goals, problems and opportunities; providing recommendations; implementation; and periodic review — parallel the aims of an IPS.

Besides providing a grounding or reference point back to the investor’s goals and objectives — and that ideally includes everything from liquidity needs and loss acceptance to more personal characteristics such as ethical concerns or other constraints on investing — an IPS gives the advisor some clout on behalf of clients when working with third-party managers.

PH&N, for example, works with fee-only planners in an arrangement in which PH&N is responsible for implementing the investment mandate of a policy, but the planners retain control over the IPS.

“If the planners are orchestrating an IPS of their own and PH&N happens to be one piece of the puzzle and there are other investment professionals that are part of the puzzle, the planner is in a much stronger position to call the shots for the client,” Phillips says.

IPSes provide an element of professionalism for advisors, he adds: “At the end of the day, it’s taking an intangible service and making it quite tangible.”

While IPSes have been around for many years, only in the past several years has there been an earnest push toward making their use more widespread across the industry. PH&N upgraded and formalized the use of IPSes 12 years ago for private clients, although the documents have always been a part of the firm’s pension and institutional business practices.

“There’s been a strong movement toward IPSes,” AIM’s Smiley says. The development of an IPS demands a complete and honest conversation between advisor and client, which helps the advisor provide sound advice and cements the relationship further because so many details are discussed. “The IPS really is a reflection of the personality of an investor,” she adds.

But it’s not all about the client. Another major benefit of an IPS is that it outlines the advisor’s role and responsibilities, says Smiley. It not only covers investing timelines, but also hits at the very heart of any burgeoning relationship, she says: “When is he or she going to call?”

The clarification of contact points, which can specify the frequency of office visits, phone calls and other forms of communication, along with how much time an advisor will devote to a client’s portfolio, eradicates the all too common complaint: “My advisor isn’t involved enough.”

“It’s your guidebook on how the relationship is going to be managed,” Smiley says.

All these issues can be revisited as the client’s situation or needs demand, she adds: “Life is dynamic and fluid, so the document has to be the same.”

With all these things going for these documents, why isn’t everyone jumping aboard the IPS float? The most likely excuse is a lack of time, says Julie Littlechild, president of Toronto-based Advisor Impact Inc. The very strength of an IPS — its attention to detail — can also be considered a drawback by paperwork-weary advisors.

@page_break@”In their minds, it’s an extra layer of administration,” she says. “But we’re in an environment in which advisors have to be looking for ways to differentiate themselves. And this is potentially one of those ways.”

An IPS does creates an opportunity for advisors to stand out from the others, Smiley says. Not only does it make for a deeper relationship between advisors and clients, it also translates into a stronger case for referrals.

“If there’s a clear understanding of what the goals and objectives of the relationship are, then you can not only retain your clients but also use this as an opportunity to talk about why more people should be doing business with you,” she says. IE

The elements of an investment policy statement

It’s one of the most important conversations you’re ever going to have with your client.

Yet many advisors don’t know where to start or what to cover when embarking on the development of an investment policy statement, says Brian Phillips, vice president of Phillips Hager & North Investment Management Ltd. in Vancouver.

“When you do your basic training and licensing, anyone in the business can talk about what a portfolio is and have a general understanding of that,” he says. “But this is a step further.”

An IPS demands advisors roll up their sleeves and dig deep in order to come up with the most precise policy, he says.

Here are the some of the main items that should be included in an IPS:

> the client’s risk tolerance;

> the client’s investment goals and objectives;

> the client’s income and cash-flow requirements;

> the client’s liquidity needs;

> time frame for the use of the portfolio;

> the client’s investment philosophy and constraints;

> a definition of the normal, long-term asset mix’s orientation;

> a definition of asset mix ranges;

> a plan showing how often the asset mix should be reviewed ;

> a definition of measurement methods (benchmarks);

> a statement of accountability, such as who will oversee the portfolio and who will administer it;

> an implementation schedule;

> a reporting schedule.