174:(UPIA) is state-adopted legislation that governs the investment conduct of private family trusts. First enacted in 1994, it serves as the hallmark of subsequent legislation (as well as how the courts now interpret such requirements relating to ERISA). UPIA requires a written investment policy for every trust in which trustees manage assets for the benefit of others. UPIA formally requires a focus on the total portfolio, rather than following its earlier regulatory guidance that individual investments should be evaluated independently of whether or not they were appropriate for portfolio inclusion. The total portfolio is now the fiduciary's central consideration when judging the trade off between risk and return. There are no more restrictions on the types of investments that can be included in the portfolio; the trustee can invest in anything that helps achieve the risk/return objectives of the trust and that meets the other requirements of prudent investing.
95:, recording the agreements the two parties come to related to issues relating to how the investor's money is to be managed. In other cases, an IPS may also be created by an investment committee (e.g., those charged with making investment decisions for an endowment or pension plan) to help establish and record its own policies in order to assist in future decision-making or to help maintain consistency of its policies by future committee members or to clarify expectations for prospective money managers who may be hired by the committee.
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236:(SEC) or with the equivalent state office. RIAs have an even higher standard of care established by fiduciary standard to carry out their responsibilities with “good faith, honesty, integrity, loyalty and undivided service of the beneficiary’s interest.” The good faith clause requires RIAs to act reasonably in order to avoid negligent handling of the beneficiary's interests, and not to favor anyone else's interest, including the fiduciary's, over that of the client.
213:(FINRA) member firms and Registered Investment Advisors (RIAs) are subject to two primary obligations in terms of consumer protection: “suitability” and “fair dealing.” RIA firms must satisfy additional fiduciary standards of care and client protection. Well thought-out procedures are critical to satisfying these requirements. An IPS can help satisfy regulatory auditors by documenting the appropriate implementation of these procedures.
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is suitable for that client. In making this assessment, the broker must consider the client's risk tolerance, other security holdings, financial situation (income and net worth), financial needs and investment objectives, among other things. Registered
Investment Advisors are subject to fiduciary standards for suitable recommendations.
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time, the IPS should provide the guidelines for all investment decisions and responsibilities of each party. As a policy document rather than an implementation directive, the IPS should provide guidance for how investment decisions will be made; it should not be a list of the specific securities to be used.
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and adjustment: Rarely does a portfolio stay as originally structured. The IPS should describe how the portfolio will be monitored for poor performers, how good performers will be identified, how (and if) rebalancing and tax loss harvesting opportunities will be implemented, and it should address any
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Whether or not fiduciary responsibilities have been satisfied is not determined by investment performance, but by whether prudent investment practices and standards were followed. To establish those practices and standards, the preparation of the IPS is one of the most important functions of the RIA.
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In addition to the suitability requirement, brokers are subject to a “fair dealing” requirement which is also described in FINRA 2310. According to this rule, sales efforts will be judged on the basis of whether they can be reasonably said to represent fair treatment for the persons to whom the sales
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of 1974, as amended (ERISA), for every qualified company retirement plan (e.g., 401, profit sharing, pension, 403) there are certain fiduciary responsibilities for managing the plan assets with the care, skill, prudence and diligence of a prudent expert and by diversifying the investments of the plan
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3. Any constraints and restrictions on the assets, such as liquidity and marketability requirements, diversification concentrations, the advisor's investment strategy (including tax management), locations of assets by account type (taxable versus tax-deferred), how client accounts that are not being
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Discussion and agreement: All the issues related to what is to happen between client and advisor should be placed on the table. Where there are questions or a lack of clarity exists, further discussion may be needed. Eventually, the client and advisors need to come to agreement on issues such as the
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A properly written IPS should help ensure compliance with these required procedures. The IPS sets forth the objectives, restrictions, funding requirements and general investment structure for the management of the plan's assets, and provides the basis for evaluating the plan's investment results. By
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When the investor is an individual client, as a general rule, the investment manager (or financial advisor) has the responsibility of creating the document, since the manager is generally more familiar with its purpose and normal content. Both the manager and the client generally sign the document,
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The presence of an IPS helps to clearly communicate to all relevant parties the procedures, investment philosophy, guidelines and constraints to be adhered to by the parties. It can be seen as a directive from the client to the investment manager about how the money is to be managed, but at the same
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The IPS development process lays the foundation for a successful relationship between advisors and clients. An important benefit of utilizing and IPS in clarifying needs, procedures and expectations is that clients have a better understanding of what the advisor is going to do with their money, and
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FINRA member firms are subject to a “suitability” requirement; this is described in the
Financial Industry Regulatory Authority (FINRA) Rule 2310. When a broker recommends that a client buy or sell a particular security, that broker must have a reasonable basis for believing that the recommendation
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UPIA specifies that diversification is part of the definition of prudent investing. It also makes clear that if appropriate investment processes are in place and followed, the trustees will not be held responsible for the results. Under UPIA, the delegation of investment and management functions is
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Clients and their needs change over time. It is therefore important that the advisor periodically returns to the first step "discovery" to make sure the client's then-current needs and wishes are being addressed. Every year or two, the IPS should be reviewed by the client and the advisor to ensure
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degree of client involvement, the asset allocation to be used, the kinds of instruments to be utilized (or not), how tax considerations will be treated, investment goals, needs for liquidity or income, investment restrictions, investment methodology, and responsibilities of each party to the other.
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Initial discovery: The initial discussions and sharing of documents that allows both the client and the advisor to learn about one another. On the one hand, this might include learning about the client's circumstances, goals, income needs, restrictions, current holdings, risk tolerance, etc. The
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An IPS also can help trustees communicate a plan's investment guidelines and procedures to those assisting in the investment process, such as investment advisors or money managers. Finally, and most importantly, an IPS provides a guide for making future investment decisions. Having and using the
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regularly asks to review the associated IPS. This is due to ERISA regulations requiring that employee benefit plans are managed to ensure that investment firms meet their financial responsibility to the employees covered by such plans. Under ERISA, all qualified plan trustees have a special
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1. All key factual data about the client, including where the client's assets are held, the amount of their assets under the management of portfolio manager, and the identification of the trustees or interested parties to the account. This can be as detailed or as simple as desired.
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efforts are directed. An “obligation of fair dealing” means that brokers must have reasonable basis for believing that their securities recommendations are suitable for and appropriate to certain customers in light of the customers’ financial needs, objectives and circumstances.
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Investment implementation: Until there is an agreement between the advisor and client about the policies to be followed, no investment trades can responsibly happen. Once the IPS has been signed by all parties, the initial and ongoing trades can be implemented according to the
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Having that increased level of understanding and confidence becomes important when markets go through a down period. The IPS establishes investment guidelines and a framework for long-term investment thinking and can help calm nerves when things are particularly volatile.
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Creating the IPS: Once the agreements have been reached on the full list of issues and policies to be followed, they need to be recorded. This document will become the IPS. The client(s) and the advisor sign the document, signifying each party's acknowledgment of the
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The investment process can be seen as occurring in six steps, as described below. Many experts believe that the creation of the IPS is the single most important step in this process. All the other steps either lead into the IPS, or are directed by the IPS.
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2. A discussion and review of the client's investment objectives, investment time horizon, anticipated withdrawals or deposits, need for reserves or liquidity, and attitudes regarding tolerance for risk and volatility.
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indicating acknowledgment of and agreement to its several parts. This can serve to protect both parties in the event of a future disagreement, as long as they have respectively adhered to the content of the IPS.
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responsibility to “prudently” manage their plan assets for the sole benefit of the plan participants. ERISA and the
Department of Labor have established the following prudent procedures for plan trustees:
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Part 2509 of Title 29 of the Code of
Federal Regulations. Department of Labor 29 CFR 2509.94-2 Interpretive bulletin relating to written statements of investment policy.including proxy voting policy or
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4. The security types and asset classes to be included in or excluded from the portfolio, and the basic allocation among asset categories and the variance (rebalancing) limits for this allocation.
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of their advisor's approach. Clients have an opportunity to understand the reasons why each action is to be taken. As a result, clients tend to have more confidence in the advisor's abilities.
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establishing the criteria and procedures for selecting investments and investment managers, an IPS can minimize “Monday morning quarterbacking” if investment performance is disappointing.
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A well-crafted IPS will include all the relevant information needed for the broker to establish that both the suitability and fair dealing requirements have been satisfied.
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so as to minimize the risk of large losses. The IPS documents these fiduciary responsibilities and ensures fiduciaries are adhering to these responsibilities.
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policy statement compels the trustees to be more disciplined and systematic, which in itself should improve the odds of meeting the investment goals.
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An investment policy is required under virtually all investor circumstances, with the exception of individual investors. According to the US
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other ways in which the investment manager will try to ensure that the portfolio will stay in line with the objectives set forth in the IPS.
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Ongoing communication: Meetings, reports, and other communications will occur between advisor and client, generally as suggested in the IPS.
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client should also attempt to learn as much as possible about the investment manager's investment philosophy, practices, and procedures.
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To emphasize its importance, in some SEC districts, SEC auditors are asking to see the IPS for a sampling of client relationships.
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for an account, and the regulations applicable to an advisor's practice. It is important to understand the requirements for each.
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Prudent
Investment Practices: A Handbook for Investment Fiduciaries, published by the Foundation for Fiduciary Studies
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Nothing should be included in the IPS to which the advisor or client cannot commit and be sure will be implemented.
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201:. Addresses the responsibilities of trustees of nonprofit monies (primarily foundations and endowments)
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There are two levels of legal and regulatory oversight: the legal requirements for clients who are
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RIA firms must be registered as providing investment management services with either the U.S.
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permitted and encouraged. Establishing and maintaining an IPS facilitates such delegation.
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The following two acts are substantially similar to UPIA; both require a written IPS.
343:“The Management of Investment Decisions,” Trone, Albright & Taylor, McGraw-Hill
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An IPS usually has five major components that should be unique to each client.
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Investment decisions must be made with the skill and care of a prudent expert
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340:“Investment Policy: Winning the Losers Game,” Charles Ellis, Irwin Publishing
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5. The monitoring and control procedures and responsibilities of each party.
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managed (if any) will be handled, and any transaction prohibitions.
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Creating an
Investment Policy Statement: Guidelines and Templates
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Additional requirements for
Registered Investment Advisory firms
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deal primarily with the United States and do not represent a
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Uniform
Management Public Employee Retirement Systems Act
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Uniform
Prudent Management of Institutional Funds Act
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409:by Norman Boone and Linda Lubitz, FPA Press, 2004
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29:The examples and perspective in this article
319:The IPS and the advisor–client relationship
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144:An investment policy must be established
67:Learn how and when to remove this message
153:Prohibited transactions must be avoided
211:Financial Industry Regulatory Authority
129:Employee Retirement Income Security Act
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