How often should I update my client's IPS?

An investment policy statement (IPS) is a reflection of the initial and on-going agreements between the client (what I want and don’t want, who I am, how much risk I’m willing to take, what decisions I expect to be involved in, etc.) and the advisor (discretion or no, the intended allocation and how much it can be strayed from and the process for rebalancing, the general investment process to be followed, the kinds of investments/securities to be used, etc.).  It should outline each party’s responsibilities to each other and identify how and when things will be reviewed and updated.

In other words, how often the IPS should be updated should be part of the IPS, part of the agreement.

WHY THE IPS NEEDS UPDATING

In broad, general terms, an update is needed when something about the original agreement has or needs to change.  While we have full discretion with our advisory firm clients’ assets, we also have an agreement with our clients that if we would like to change anything that is documented in the IPS, then we need to check with them first, before making that change. That makes the IPS a meaningful document, to our clients and to us, and it gives an important degree of control to clients about their important issues as they are asking us to manage their investments on their behalf.

In the IPSs we have, the most frequent change is a change in the asset allocation.  Rather than update the whole IPS, we simply send our client a single sheet that acts as an amendment to the IPS, reviews their current target allocation, highlights what changes we want to make, and it provides a simple explanation regarding why we want to make the change (in all cases, we’ve talked to the client beforehand to explain our reasoning and get their input).  Their signature is evidence of their approval and amends the IPS so that it is kept up to date.

EVENT-BASED UPDATES

Because an important element of the IPS is documenting who the client is, what their mindset was when they approved the investment process, and what their goals and tolerance for risk were, we believe it is important to renew the IPS periodically.  It helps to have the IPS as part of the discussion every time you talk with the client, reinforcing that it is a living and vital document that you take seriously.  That said, the IPS needs to be updated when and if the following events occur:

You want to change something about your investment procedures or policies that is different from what is in the IPS.

You want to further clarify a procedure or policy that is less than clear in your IPS.

You want to change how you are managing this particular client’s investments (e.g., change in asset allocation or change in types of securities or asset classes to be utilized).

When there are meaningful changes to the client’s circumstances.

SET A REGULAR UPDATE SCHEDULE

Beyond updating the IPS when circumstances require it, we also recommend keeping a regular schedule of review and update. Individual clauses can be reviewed and updated on a schedule that corresponds with normal portfolio monitoring procedures.

In addition, we think the IPS should be reviewed in full on an annual basis to review for any outdated information. Once the IPS is sufficiently old, you and the client (or the courts!) might consider it stale and no longer valid. Just on principle, we believe every IPS ought to be rewritten every 3-5 years, just to remind the client this is an active and important document and because it needs to accurately reflect the client’s current thinking and circumstances (which often evolves over time without anyone realizing it).  The IPS needs to be updated so that your understanding and the information documented in the IPS is always current, consistent and accurate.  Unless you formally ask every once in a while, you can’t be sure that your thinking and the client’s thinking are the same.

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Norman Boone, MBA, CFP® is one of the creators of IPS AdvisorPro and an expert on investment policy statements. He is also the founder and principal of Mosaic Financial Partners, Inc. in San Francisco. He will be appearing at INSIGHTS 2015, fi360's professional development conference, in March. 

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"Irrespective of whether a firm must meet a suitability or fiduciary standard, FINRA believes that firms best serve their customers—and reduce their regulatory risk—by putting customers’ interests first. This requires the firm to align its interests with those of its customers."

This statement was part of FINRA’s annual Regulatory and Examination Priorities letter that came out yesterday. It’s a notable position to take for the self-regulator that is thus far under no obligation to expect anything more of its members than the traditional suitability standard. But if you’ve been paying close attention, it’s just one more signal of the industry-wide trend towards placing the best interests of investors ahead of all other interests.

In his most recent Fiduciary Corner column for InvestmentNews, fi360 CEO Blaine Aikin looks at some of these trends that are working in investors’ favor, even as the wait for SEC action on a fiduciary rule drags on through its fifth year.

To read the entire blog, please visit www.fi360.com.

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As redemptions from Pimco reach $100 billion in the wake of departures by both Bill Gross and Mohamed El-Erian, investors and advisors still holding Pimco funds are left to figure out if they too should be making changes to their portfolios. Fiduciaries, however, need to be deliberate in their decision-making. Context is everything and it would be a mistake to act rashly and without a clear rationale for how a particular decision is ultimately the best decision for the portfolio.


To read the entire blog, please visit www.fi360.com.