When our clients begin a wealth management relationship with Coldstream, the first thing they do is sign a stack of paperwork. This generally includes an Investment Advisory Agreement – our formal contract with you, authorizations to trade your accounts, move assets and shop bonds from multiple brokers, and so on. All of these items are valuable and necessary, but we try to highlight one particular document that otherwise might get lost in the shuffle: the Investment Policy Statement, also referred to as your ‘IPS’. We believe the IPS is truly at the heart of what we do for our clients, and so it deserves a little extra attention.
Simply put, the IPS is our way to capture the goals you want to achieve with your wealth and the tools we use to attain those goals. It should give you a clear picture of how we see your objectives and constraints, what you can expect for your portfolio’s asset allocation, and how your personal situation has changed and will change over time. When drafting an IPS, the most important input for us is learning as much as we can about you and your household: your lifestyle, cash flow needs, family situation, and generational or charitable intentions – these all help us determine your requirements. Our New Client Risk Questionnaire focuses on particular topics which could impact your peace of mind, an important part of risk tolerance, and learning about your mix of account types, essential in allocating specific investments to the most tax-efficient vehicles. We include a review of any trust documents to ensure we understand the purpose of a trust and who its beneficiaries are, since a trust established for the benefit of future generations might have very different investment objectives from a client’s own personal accounts.
In most cases, thoughtful inquiry and patient listening is required to help us complete the picture. Even casual conversation almost always provides valuable insights into IPS components. For example, when a prospective client describes her rental homes in Kauai, Whistler, and Sedona, we begin thinking about the size of real estate in her overall asset portfolio and implications this has for our investment strategy. Caring for an elderly parent or supporting grandchildren’s college education might require the portfolio to generate additional cash flow for a certain period of time. In short, any factor that affects your relationship with your investment portfolio is potentially relevant to an IPS, and should be communicated to your Relationship Team.
Additional dialogue and coaching over time are sometimes required, as realistic expectations are critical to the success of any investment plan. Risk comes in many forms beyond a simple decline in price; other factors like liquidity, potential loss of purchasing power due to inflation, legal and tax exposure, and the complexity of an investment strategy must be taken into account. When a client’s return objectives and risk tolerance are in conflict, it is our responsibility to raise these issues in a sensitive but up-front way. Similarly, if a client wishes to place certain restrictions on his portfolio for ethical, financial, or other reasons, we need to communicate the potential impact in terms of returns, volatility, taxation, etc. so that the client may make fully informed decisions about the management of his wealth.
Lastly, it is important not to view the IPS as a static, rigid document that is established once and never changed. Since the goal of the IPS is to capture the relevant factors of our wealth management relationship, it should be a living document that evolves as your needs, goals, and resources change. Key life events like marriages and divorces, the purchase or sale of a home or business, receipt of a bequest, or retirement can have a huge impact on an IPS and may sometimes require a nearly total revision. However, even the simple passage of time and the evolution of a client’s portfolio may prompt certain updates or changes. For this reason, we ask clients to formally revisit and re-sign their IPS at least every two years.
Like a good road map, spending a few minutes from time to time to review your IPS can pay large dividends. An accurate, comprehensive, and up-to-date IPS is vital to a strong relationship with Coldstream, enhancing our ability to manage your wealth as we navigate the road to financial success and beyond.