Fiduciary Corner: The importance of the investment policy statement

The purpose of the investment policy statement is to document the investment plan and provide guidance for consistent, informed decision-making. It should be the central component of all advisory relationships, serving as both a roadmap to investment success and a barrier to the kind of bad investor behavior that can derail even the best laid plans.
But a survey of advisers from Russell Investments earlier this year found that 61% of advisers do not create investment policy statements for their clients. Unsurprisingly, given that finding, 60% also reported being asked by clients to take an action that deviated from the investment plan the adviser and client had agreed upon.
Knowing that most advisers regularly confront clients who want to change course at the first sign of turbulence, it’s confounding that so many avoid implementing an IPS. And yet, the reasons most advisers give for not having one are completely counterintuitive.
The most common objection to an investment policy statement is the idea that it is a compliance burden. The theory is that if you create an IPS and that don’t abide by its terms, you are setting yourself up to be sued. This is a simple problem to avoid. An IPS should only contain those provisions that you intend to be following anyway. If there are provisions that you don’t believe you will be capable of fulfilling or that aren’t in the best interest of the client, the plan needs to be reconsidered and all governing documents, including the IPS, must be brought into alignment.
Another objection advisers have to the IPS is that they just aren’t worth the effort. If you are not accustomed to building one into every client relationship you have, they may seem difficult to build and difficult to maintain. But, again, this reasoning is flawed. As an adviser, you spend lots of your time, particularly with a new client, carefully gathering information about that client, developing risk and return parameters for the client’s time horizon, building an asset allocation, presenting your plan to the client for approval, conducting due diligence, selecting service providers, etc., all so that you can achieve a level of confidence that the client’s investment goals are attainable.
And then, you allow that confidence to be eroded when the client decides to call an audible and make new decisions, often based on something he saw on television, or heard from a friend or family member, or just has a hunch about. Considering the time and effort it takes to formulate a sound investment strategy with and for your client, it is simply negligent to fail to commit that plan to writing. The time required to prepare an IPS is minimal, especially when technology can be leveraged to do so effectively and efficiently.
And that’s where we hit on the defining reason why the investment policy statement is so important: because adherence to the fiduciary standard is all about process. If questions ever arise as to whether or not you did your job as a fiduciary, the answers won’t come from the investment results themselves, but what decisions you made and how you made them. You will be asked to demonstrate that there was a decision-making process in place and that it was consistently followed. Demonstrating this without a documented plan is difficult, actually maintaining any kind of consistent process without an IPS is nearly impossible.
Your clients are human, so they will continue to exhibit the human traits of being reactionary and wanting to take action when things don’t go their way. And while there is nothing wrong with revisiting your plan periodically to ensure that it still holds up as being the best plan, you do want to ensure that the act of making changes to the plan is itself the result of a careful decision-making process.
When our company recently acquired the investment policy statement technology IPS AdvisorPro, we were asked the question, “What does fi360 hope to accomplish?”
In short, we want to turn around the whole perception of the IPS. We want advisers to see that there are greater risks in avoiding an IPS than by committing yourself and your clients to a documented process. That more effort is wasted in the long run by not taking the extra step of formalizing your plan at the outset of a relationship. Ultimately, our goal is to turn that 61% majority around and make it the rare client-adviser relationship that does not have an investment policy statement at its center.
(Blaine F. Aiken is president and chief executive of fi360 Inc.)