Create Your Investment Policy Statement

Norman Boone, CFP®, is on a mission. The San Francisco–based financial planner is seeking to inform investors and their advisors about the importance of creating an investment policy statement (IPS).

For physicians, his message is especially critical. "Doctors may legally have a fiduciary responsibility to create an IPS if they act as the trustee on a qualified retirement plan in their medical practice," he warns. "I can guarantee the majority don't have one and they are exposing themselves to personal liability."

Understanding an IPS

An IPS is basically a written roadmap for investing— one that clearly outlines investment goals and objectives and how they will be implemented. And like a roadmap, it can help physician-investors and their advisors stay on course. "It's simply a document to say ‘this is where we're going and how we're going to get there,'" Boone comments. "It doesn't have to be real big and fancy."

For years, IPSs have actually been legally required as part of the Employee Retirement Income Security Act, yet, according to Boone, "Almost no one knew about them 10 years ago." Today, they are required wherever a trustee is in place, such as an insurance trust, family trust, company-qualified plan, foundation, endowment, or charitable trust. Hence, Boone is warning physicians running their own practices.

But even for those physicians not serving as trustees, an IPS still makes good financial sense for personal investing. Boone has found they create a "best practice" for individual investors. Indeed, one of the greatest advantages of an IPS is its written commitment to investment consistency, which helps to counteract emotional decision making. "That's when investors lose," Boone says, "when they're reacting to the day's news."

Creating an Investment Policy Statement

Boone is so passionate about the topic that he and Linda S. Lubitz, CFP®, have recently coauthored the book (Advisorpress; 2004). The book is available at www.fpanet.org. Their Web site, IPSAdvisorPro.com, will help advisors and investors create effective IPSs. Unfortunately, Boone notes, many financial advisors themselves are still not well versed on creating IPSs.

Noting the Particulars

So what, specifically, should an IPS contain? Here are some brief tips from the book:

• Objectives—It should establish clear and definable expectations, risk and return objectives, and guidelines for the investment of assets.

• Defined asset allocation policy—It should set forth a structure and identify the asset classes to achieve a diversified portfolio, as well as determine how those assets are to be best allocated toward the achievement of objectives.

• Management procedures—It should identify the process or criteria by which investments will be selected, monitored, and evaluated as well as under what circumstances changes will be made.

• Communication procedures—It should provide the types of exchanges and frequency of communication between the advisor and the client, and outline the investment performance information to be provided. It should also assign the responsibilities the parties have for each other.