Last time I talked about the difference between a fiduciary and an investment adviser that operates from a suitability standard. The conclusion is always that it is better to
have a fiduciary working for you.
As a fiduciary, it is important that we lay out a “blueprint” for your financial house that is customized to you and one that you understand.
The blueprint I am referring to is the Investment Policy Statement or IPS. An IPS describes the investment philosophies and investment management procedures to be utilized for the investment portfolio.
The principal reason for developing an IPS and for putting it in writing is to enable both the client and the investment adviser to protect your portfolio from ad hoc revisions of a sound long-term policy. The IPS is intended to provide a well-thought-out framework from which sound investment decisions can be made.
The building of a house always begins with the foundation. In this case, the foundation is formed by determining the risk tolerance that you are comfortable with. This is determined both in writing, using a risk tolerance questionnaire, and also with personal meetings to discuss attitudes and concerns.
I often compare what I do to the work of a physician. When you go to the doctor, especially for the first time, he or she will ask you a hundred questions about your health, family history, attitudes toward your general welfare, etc.
When working with a financial adviser, there is little difference. It is important that I know my clients’ risk tolerances and also their attitudes toward money, the economy, taxes, inflation, government and what their needs and expectations are going forward.
We not only need to agree on what vehicles to use and which ones not to use but also what benchmarks to use when measuring performance. It is vital to know liquidity needs both now and in the future as well as any legal or legislative constraints.
A competent fiduciary will analyze the current investment positions in their entirety to make sure no position is “overweighted” in any one company, sector or geographical region.
The IPS will fully describe the asset allocation for the portfolio. So, depending on the risk tolerance, maximum percentages will be determined for each category and sector of investments, e.g., equities, fixed income, alternative and cash.
Under equities, for example, we will have allocation schedules to large cap growth and value, mid cap, small cap, emerging growth and international. Fixed income might include short- or long-term bonds, tax-free municipals, government bonds, CDs, or private debentures.
Inflation protection might include precious metals, TIPS (Treasury Inflation Protection Securities) commodities or foreign currencies. The list of investment vehicles can be very long or quit short depending on the preferences of each individual client.
An IPS, just like a visit to the doctor, should be reviewed on a regular basis. In this fast paced society, a client’s needs and/or attitudes can change very quickly and the IPS needsto be flexible enough to compensate and adapt to those changes.
Finally, the IPS will spell out the frequency and types of meetings and communication for both parties. All too often I have talked to people who have said they have not talked to their adviser for along time. The IPS addresses this and prevents both parties from ignoring or neglecting the other.
If your adviser does not put together a complete investment policy statement for you, you are letting him or her off the hook for looking out for your best interest. I know that it takes some time to go through this process but the rewards are certainly worth it, not to mention the protection it offers.
It is my opinion that it won’t be long before every investment adviser is required to operate from a fiduciary standard. You need to demand it now from your adviser or you need to get a new adviser. I can think of only one that I would absolutely recommend, who will always look out for your
best interest. O
Gary L. Rathbun is the president and CEO of Private Wealth Consultants, LTD.
