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Why Should Every Investor Request An Investment Policy Statement?

Why Should Every Investor Request An Investment Policy Statement?

By John McCord, Cardinal Point Wealth Management

 Managing the financial affairs of individuals, families and entities involves a great deal of responsibility within the professional advisory community. Thus, clearly defining the "responsibilities" of both clients and their financial advisors is crucial to any ongoing partnership. Working within this spirit, clients should request a document called an Investment Policy Statement or IPS. An IPS is not a financial plan in itself. However, it is an important component of a holistic financial plan. A holistic financial plan considers investments, taxation, insurance, estate and retirement planning. In contrast, an IPS is primarily concerned with the structure and oversight of the investment component. Specifically, an IPS is a written agreement between clients and their financial advisors. The agreement details a client's asset management strategy and should be reviewed at the inception of an advisory relationship.


Clearly, a financial advisor must strive to understand his or her client prior to creating an IPS. Both written and verbal questions are often posed in order to firmly grasp a client's financial planning situation. Once created, an IPS will detail and define a client's needs, goals, investment knowledge, net worth, time horizon and risk tolerance. Also, cash flow and liquidity needs will be quantified. For example, a client's five-year goal to save a lump sum that creates a ten-year annual payment of twenty thousand dollars will be noted within an IPS.

Importantly, a well-constructed IPS will articulate the investment advisory process while offering guidelines and control procedures. These details are especially important for a discretionary financial advisor working under the fiduciary standard. Discretionary financial advisors place orders for their clients under an agreed upon strategy, which is defined within an IPS. The fiduciary standard complies with the highest standard of care when working on a client's behalf.


Many IPS documents contain a financial advisor's investment philosophy, a proposed portfolio asset allocation, security selection methodology, and appropriate rebalancing procedures. The accounts to be managed will also be documented, as will the risks inherent in investing. The client and their financial advisor will both sign and acknowledge the IPS. Additionally, the client is encouraged to ask questions when presented with their custom IPS. This mutual acceptance helps ensure that the client and financial advisor are working in tandem and helps alleviate any potential misunderstandings.


It is important to note that an IPS is a flexible document. When prudent, it can be adjusted as changes occur within a client's situation. Likewise, a material realignment within the investment environment might be a catalyst for an IPS revision. It is important to mention that adjustments should be infrequent and occur only when necessary.


There is no "one size fits all" cross-border financial planning strategy. Therefore, it is important to partner with a qualified team of tax, legal and investment professionals who specialize in Canadian and United States cross-border transitioning and asset management. Please contact Cardinal Point Wealth Management at http://www.cardinalpointwealth.com/US/contactus.html to review your unique situation.

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