Get It in Writing

by Jeff C. Johnson

Man and woman discussing business with phones, laptop, tablet

People sit down together to do business and come to a handshake agreement. Then, as time passes, what was discussed, what was agreed to, is sometimes forgotten … or worse yet, remembered incorrectly. Everyone has experienced this.

With your savings and your financial future in the balance, why would you take the chance of not having your life plans and directions to your adviser in writing?

Still, people do it all the time. They invest money with only the slightest direction to their broker or financial guy or gal to be “conservative” or “aggressive” or “middle of the road.” “I trust you,” they say, perhaps not understanding that, while trust is absolutely necessary, there’s also more involved. Based on my decades of experience as a financial professional, I’d guess the majority of all investors have no detailed written plan to guide their advisers.

My firm, Buckingham Strategic Wealth, and many other Registered Investment Advisory firms use a document called the Investment Policy Statement (IPS) similar to those employed by professional and institutional investors for many years. Though there are no set requirements for what to include in this document, there is some detail that must be addressed. To illustrate what a “good” IPS looks like, I have included selected pages from an example for fictitious clients, Buck and Betty Client.

In what, in total, is a 16-page document, we start off with the financial planning and investing process, developing goals and assessing risks. We outline specific investment strategies and how investments will be monitored and kept up-to-date and in compliance with the IPS.

The nitty-gritty of portfolio development should be carefully and clearly stated, and the portfolio asset allocation targets should be displayed. This hypothetical portfolio sets Buck and Betty’s asset mix at 50 percent equity (i.e., stocks), 15 percent nonstock-market (“alternative”) growth investments, and 35 percent fixed income (bonds).

At Buckingham, we realize the importance of helping investors understand their ability to take risk, their willingness to take risk, and their need to take risk, as well as the importance of helping them understand the historical performance of a portfolio similar to their stated asset mix.

Additional detail about specific investments and the portfolio’s composition paint a more complete picture of the strategies the adviser will use and the approaches the adviser will take to manage the portfolio.

Not to be skipped over, the advisory fees paid by the client to the firm are clearly stated and on the last pages. Both the client and adviser sign the document to attest to their acceptance and agreement.

For greater detail on the investment process, get a copy of my soon-to-be-released second edition of The Eight Points of Financial Confidence.