Your business: Making it policy

(January 2003) Determining your client’s risk tolerance and suitability for certain investments is key to the client-advisor relationship, yet according to our first Annual Dollars & Sense Survey only 15% of advisors use investment policy statements (IPS).

“I’m surprised at the number of advisors who don’t use them,” says Dan Brintnell, president and co-founder of Harrington Lane Inc., a professional advisory company based in Toronto. Harrington Lane recently published a white paper entitled A Wealth of Business: Harnessing Canada’s HNW Market that addresses investment policy statements and an advisor’s need to implement them into his or her business.

An IPS, much more detailed than a Know-Your-Client form, outlines both the investment objectives and constraints the client faces. Investment objectives look at return requirements and risk tolerance. Constraints include liquidity requirements and the time horizon planned, legal restrictions, tax issues and any unique circumstances. To structure an IPS, advisors determine the client’s total wealth and how much they have to invest, while keeping in mind these investment objectives and constraints.

Nancy Cobban, an investment advisor with RBC Dominion Securities in Toronto, has been using investment policy statements formally for over 10 years. Though she admits they are time-consuming, she says they are absolutely worth the effort. “The IPS guides the investment decision-making process.”

Rob McClelland, a Toronto-based advisor with Assante Capital Management agrees. “It’s the blueprint for how we are going to manage the investments,” he says. “It ensures that in a bull market, we are constantly taking profits and in a bear market we are consistently buying low.”

Advisors need to ensure that the IPS is individualized to the client. “Risk tolerance is by far the hardest for advisors to assess,” says Brintnell. He suggests advisors start by asking clients profiling questions. There are some disadvantages to profiling questions, he notes, as clients may not completely understand them — or worse, think they understand the question and answer improperly. Also, questions tend to be all encompassing, when in reality clients compartmentalize their money — for the education fund or the retirement fund. That’s why McClelland has his clients fill out a questionnaire for each type of account. “We not only want the account to assume the right amount of risk and target the right return, we also want each to be as tax-efficient as possible,” he adds.

The biggest benefit for clients is that an IPS can help remove the emotion from the portfolio, Cobban says. “Having used the IPS with clients for strong market years helps maintain their objectivity,” she explains. “They could have ended up with a larger commitment to technology during the difficult market. The portfolio was in better shape to weather the storm.”

Brintnell stresses the importance of keeping the IPS updated. “It’s a living document,” he says. “Advisors need to review the IPS with the client at least once a year.” In fact, failing to keep an IPS up-to-date may be worse than not having one. “You end up investing with inaccurate information,” he cautions. “It’s no different than someone dying with an out-of-date will,” he says.

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For an extensive Investment Policy Statement template that you can open as a Word document and customize to suit the needs of your clients, please click here.

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This article was originally published in the January 2003 edition of Advisor’s Edge magazine, a sister media property of Advisor.ca in The ADVISOR Group. To register for a free one-year subscription or to view archived Advisor’s Edge articles, please click here.

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Jennifer McLaughlin is assistant editor of Advisor’s Edge and can be reached at jmclaughlin@rmpublishing.com.

(01/27/03)