How to avoid compliance problems with an Investment Policy Statement

An Investment Policy Statement defines, among many of other things, the client’s objectives, risk tolerance and preferred investment strategy. It lays out how the advisor will help the client meet those goals and how often the document will be reviewed. An IPS can improve a client’s understanding of the investment process and help the client stick to his or her plan over the years as markets shift.

What goes into a good IPS? They are not mandated by any regulatory bodies, so there is no standard to which they must comply. But there are many resources for investment policy statements that advisors can use as guidelines. Johnson cites Advocis’s Best Practices Manual, which has a chapter outlining the objectives, structure and content of a good IPS.

Technology can also play a role. Many financial planning programs include IPS software. The most popular financial planning program in the survey, AIM Funds Management Inc.’s free-of-charge In Sync, for example, includes an an IPS component.

The IPS program is also integrated into the firm’s investment-planning software, and it can be downloaded separately, according to Brent St. Pierre, AIM’s assistant vice president of e-business.

The IPS comes in the form of document templates that can be filled out online or in hard copy. For advisors who wish to create their own IPS, there is a guide that tells the advisor what information to get from the client.

Mackenzie Financial Corp.’s InfoMack, the second most popular planning software in the survey, has no IPS component. But the firm’s Symmetry wrap program does have one. It’s a product-specific program, but many advisors are using it as a template to help them create their own general IPSes on their word-processing applications, says Steve Wylie, Mackenzie’s senior manager of marketing.

Most high-end financial software include IPS capabilities. Johnson recommends Plan Plus Inc.’s Web Advisor as a financial planning program that has a good IPS component. “It’s easier to create and edit and easier understood, which gives it a competitive advantage,” he says.

Some IPS software programs are very basic, while others are highly detailed and comprehensive. How detailed an IPS should be depends on the complexity of the individual client’s situation. It’s up to the advisor to select the program that can handle the various needs of his or her clients.

Johnson says choosing the right program begins with the advisor defining what he or she wants from the software.

Next, comes a perusal of software manuals from a number of suppliers to determine which best meets the specific requirements of the practice. How easy is it to use the investment policy statement feature of the software?

Whether an advisor chooses a sophisticated program or decides to bang out an IPS on a word-processing application is not important, says Johnson. What matters is that the IPS does its job for the advisor and the client.

“As long as there’s a strategy on paper that an advisor can stand behind and explain and reference at a later date, I don’t think there’s any carved-in-stone investment policy statement template for what must happen,” he says.

“Whether it’s one page or 10 pages, an IPS says: ‘Here’s the strategy that we’re using, here’s the benchmark we’re going to be measuring against and here’s what we’re going to be referencing as we move forward in the relationship’.” An investment policy statement will make your life easier with your compliance department as well.IE