Only 39 percent of advisors created an investment policy statement (IPS) for all of their clients last year, and 21 percent said they didn’t use these statements at all, according to a recent Russell Investments survey. Russell says this may be an indication that many advisors are missing an opportunity to help clients stick to a disciplined investment plan.
The IPS is a written document that outlines a client’s risk tolerance and goals, as well as the agreed upon investment strategy for the advisor to best achieve the client’s desired results.
An IPS is a powerful commitment device in down markets, according to Russell. Advisors can use it to remind investors of the long-term view they agreed to when they were more calm and collected.
“The investment policy is meant to be a long-term plan, you don’t want short-term disruptions causing you to have to make changes,” says Kerry Falco, CPA, managing director and senior financial counselor at Weston Financial Group in Wellesley, Mass. “The IPS should be broad enough to cover short-term events because markets don’t just go straight up. We have to provide for volatility and for periods of down markets.”
Brendan McPoyle, CFP, financial advisor and partner at Affinity Wealth Management in Wilmington, Del., says his firm uses the same standard investment policy statement form for every client. “As a company, I want every advisor following the same protocol,” he says. “It is our benchmark. It covers the client and it covers us.”
But sometimes, clients don’t want to stay the course. According to the survey, 60 percent of advisors surveyed said that reducing risk was the major reason why clients strayed from their IPS last year. And 59 percent of respondents stated that clients who deviated from the policy were acting on non-professional advice, such as from the media or family and friends.
When clients seek to deviate from an agreed-upon plan, advisors can use that opportunity to revisit the client’s IPS. Advisors review these statements with clients annually (49%) or when a client’s situation changes significantly (21%), the survey found. Over the course of a long-term advisor-client relationship, the IPS may be revised several times. As life changes occur––such as marriage and divorce, births and deaths, employment and retirement––the IPS may need to reflect those changes.
Russell’s Financial Professional Outlook survey includes responses from 479 financial advisors working in 115 national, regional and independent advisory firms nationwide. The survey was conducted in February.