Do You Have an Investment Policy Statement?

 

In my last post, I mentioned the use of an Investment Policy Statement. But what is it and why should you have one?

Let’s start out by describing what one is. An investment policy statement is a written document between an advisor and a client that outlines the client’s investment goals and objectives. It provides guidelines for both parties that they must adhere to. Within an investment policy statement are written guidelines that state which type of investments are acceptable. It can also control how aggressive or conservative a portfolio can be and the advisor has the ability to spell out how they manage investments. The investment policy statement provides guidance to both parties and allows for an understanding of boundaries and communication of goals in a written document.

I have seen three typical examples that investment policy statements come in handy. Some clients only want to invest in socially responsible investments. This can be written into the document which will prohibit the advisor from purchasing investments that are not appropriate.  Another example would be if you are a conservative investor. Both you and your advisor can outline how aggressive you would want your portfolio to be. Often times this is only briefly discussed and never comes back unless the market takes a down turn. The last example is one that I see very often as an advisor.

Client’s often come in and state they want to buy this hot stock (recently it’s been a discussion about social media stocks). The investment policy statement allows me to restate my investment philosophy and how I manage investments. After these discussions, clients often sees the “light” and realize the importance of staying on track.

I utilize investment policy statements in my practice for a few reasons and I believe they are essential for clients to have them. The examples above illustrate the importance but what investment policy statements ultimately do is create a set of expectations as well as transparency. As many of your are aware, the financial planning industry is unclear. Many advisors are unclear on how they manage investments and unclear on how they charge for their services. It is my utmost belief that the planning process should always include the client. After all, it’s their goals.

Photo courtesy of Moyan Brenn