Just as regular health checkups with a qualified physician are an important proactive step to maintaining your physical health, regular financial checkups with an experienced financial advisor are an important proactive step to maintaining good financial health.

A proper financial checkup starts with a review and update of an investor’s Investment Policy Statement (IPS). The IPS is a synopsis of an investor’s objectives, constraints and policies that govern the relationship with their financial advisor. It helps foster:

  1. Prevention
    A well-constructed IPS presents an investor’s financial objectives, the degree of risk they are willing to take and any relevant investment constraints that their financial advisor must adhere to. Updating the IPS is a dynamic process involving identifying these investment considerations. Since the IPS is a written document that outlines these considerations, it also helps prevent the investor and/or advisor from making any unwarranted changes to the investment portfolio.
  2. Education
    To the extent that drafting the IPS is an educational process, it may help investors better recognize appropriate investment strategies as well as realistic investment goals. Equally important, it provides groundwork for discussing risk and return. The IPS serves as a document of understanding that protects the individual investor if the advisor adheres to the investment policy. If management practices or investor directions are subsequently questioned, both parties can refer to the policy statement for clarification or support
  3. Relationship
    One of the most important parts of financial planning is the client-advisor relationship. It takes multiple interactions for a financial advisor to really understand an investor’s complete financial picture, history and values in order to help truly provide personalized advice.

When world events or market performance tempt investors to make changes to their portfolio, the Investment Policy Statement may help everyone stay focused on an investor’s long-term objectives.

by  Sheldon P. McFarland