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Creating an Investment Policy Statement: Resolving Conflicts

Wealth Management Portfolio Management

After you and your advisor have analyzed your ability, willingness and need to take risk, you may realize that there are some conflicts that need to be resolved. For example, you might have a high need to take risk but little ability or willingness to do so. Or the reverse might be true.

The role of an advisor is to assist you in resolving these conflicts, helping you decide which branches of the IPS decision tree should take priority by reviewing the benefits and risks of each potential decision. A good advisor never makes the decision for you. Instead, he provides the knowledge and experience necessary for you to make the decision. That’s important, because if you’re able to take individual ownership for the decision (fully understanding and appreciating the implications of your choices), then you are more likely to have the discipline to stay the course that results from that decision.

Resolving conflicts regarding risk tolerance will allow us to create an appropriate IPS for your needs. Your IPS is a confirmation of your commitment to the decisions and process described therein. During times of emotional stress, the signed document will serve as a reminder of the original reasoning behind your decisions regarding appropriate asset allocation, asset location, degree of risk and spending and saving goals.

In addition, it is important to realize that the process of determining an appropriate asset allocation is not a one-time event. For example, your ability to take risk may change as a result of the simple passage of time. Life-altering events such as births or deaths, marriage or divorce, career changes, or an inheritance may impact your ability, willingness or need to take risk. In addition, market movements can lead to changes. For example, bull markets generally lower the need to take risk for older investors who have already accumulated wealth, while raising it (because of the now-lower risk premium) for younger investors just beginning their investment journey. Bear markets have the reverse effect. Thus, it is important that the IPS be reviewed on a regular, ongoing basis to ensure that the original asset allocation is still appropriate for your needs.

Working with your advisor to create an investment policy statement that addresses your ability, willingness and need to take risk is a critical first step on your investment journey. By starting with a clear roadmap, you’ll be able to move forward with confidence and capably weather the shifts in the market while making progress toward your long-term goals.

This material is derived from sources believed to be reliable, but its accuracy and the opinions based thereon are not guaranteed. The content of this publication is for general information only and is not intended to serve as specific financial, accounting or tax advice. Copyright © 2012, The Cogent Advisor LLC, used with permission.