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The Power of Investment Policy Statements

I’m sure it started with the best of intentions, but I think it has really become more about CYA than something that actually helps investors reach their financial goals. What is it? It’s commonly called an Investment Policy Statement (IPS). It started out as document or agreement to help clients and advisors/investment managers understand how the client’s money is to be managed. In some cases, it might outline the proper asset allocation in an account and identify under what circumstances a change should be initiated.

Unfortunately, it has evolved into a cookie cutter approach, where a “model” can be applied across the board to each and every client who wants a “growth model” or “growth and income model.” Unbeknownst to each client, it pretty well says the same thing to every client in that model. Your asset allocation is “ABC” and this is what we will or won’t do under these “XYZ” conditions. Typically, the end product often turns out to be a long disclaimer about what an investment firm will or won’t do for an investor.

I’ve looked into software that I could buy to create my own IPS based on a template. But that cookie-cutter template turns out to be the norm. It doesn’t matter much whether they are three pages long or a hefty 40 pages. They tend to instruct you to “select this sentence if your client is an aggressive investor,” “select this sentence if your client is conservative,” “select this sentence if your client is retired.”

I guess my problem with the standard IPS is that it really doesn’t help clients better understand their current portfolio and whether they are on track to meet their goals. We can do better. Much better.

Instead, picture a road map that helps guide an investor and his or her financial advisor, something that helps them chart a course, providing a vision of where they’re going and helping them as they work towards that destination. Your investment policy statement –– I’ll use “road map” from now on –– should give you a picture of where you’re going, what’s involved and what role each of your accounts plays in moving towards meaningful, articulated goals.

I don’t want those accounts to be labeled simply as “Retirement” or “Education.” I want us to have a year to target when you’ll retire or when you expect to use that education fund. What will your retirement look like? How will you use the money that you save? When it comes to retirement, especially, you want to be well prepared because you won’t have a Plan B. Or at least, if you’re not well prepared, you probably won’t like that Plan B.

And being prepared means stating your goals clearly, and what you need to do to reach those goals, plus how well you can tolerate market ups and downs. You need a personal road map to help you get to where you’re going.

At the end of the day, you want to be able to look at this road map and know whether you’re on track. “Am I in control?” “Am I achieving what matters to me?” “What did I say I’d want to do if the market got a little turbulent?”

You don’t want to risk veering off the road when a storm comes and you can’t see or think or steer clearly. Instead, that road map could be pivotal in keeping you on the path to your goals no matter what the road conditions will be a decade from now.