Our legacy planners have urged us to create an Investment Policy Statement (IPS) that would enable outside onlookers (like my wife and me and/or our legacy planners, for instance) to say, “Yes, [our investment advisor] is living up to the requirements of our IPS. He or she is investing according to policy.” Or, “No. He has violated this parameter. He needs to come back into line.”

Right now, we have no such statement and, as a result, we can’t really be sure whether and to what extent our investment advisor is pursuing a particular plan or simply “going with the flow” of whatever happens to cross his mind at the moment.

********
Originally, our legacy planners asked our investment advisor to give them copies of his current investment policies for our various accounts.

And our investment advisor objected to what looked like an attempt on their part to “butt in” on his area of expertise. “Why do they need to know about my investment policies? What does that have to do with legacy planning?” he asked.

Part of his concern arose from the fact that our legacy planners work for a firm that, in addition to legacy planning, offers investment advisory services. He was concerned they were “simply” going to attempt to second-guess him and, with 20-20 hindsight, demonstrate what a bad job he has done in the last year in the midst of our rather unprecedentedly awful market performance.

Our legacy planners were able to put that fear to rest. “We are not looking to steal your business. We charge the high fees we do so that we have absolutely no need to sell other services. Our services are completely separate from the ‘other side’ of the company. . . .”

Still, the question remained: “What does an investment policy have to do with legacy planning?”

The primary answer I have been able to elicit so far has to do with a fundamental aspect of making future plans for financial wealth: What kind of wealth can we expect to have in 20 or 30 years? Depending on our investment practices, we may expect, with greater or lesser degrees of confidence, to enjoy certain levels of return on investment. Our legacy planners suggested that we ought to have a policy so that we can have a fair degree of confidence about what kind of legacy we will have to pass on in 20 or 30 years.

That answer, too, seemed to have made good sense to our investment advisor. But it has taken him an awfully long time to come up with a statement.

Finally, early last week, I told our legacy planners that I was less concerned about whether our investment advisor could produce an investment policy that told us what he is doing now than I was that we create a truly strategic policy statement–and that, creating a truly strategic plan, is what I thought their job is.

Besides that, frankly, I had no idea what they might really be looking for. Perhaps, if they could show my investment advisor a model of what they were looking for, he would be in a better position to provide such a thing for them.

Here is a slightly edited version of a general/overarching Investment Policy Statement they suggested for our family. It looks like a decent model to me:

DRAFT Investment Policy Statement
for John & Sarita Holzmann

Type of Account:	Individual
Expected Investment Horizon:	Varying
Risk Tolerance:	Balanced/Preservation
Net Annual Deposits (Withdrawals):	Varying
Tax Status:	Combination

Overview
The purpose of this Investment Policy Statement (IPS) is to assist the Holzmanns and the Holzmanns’ Investment Advisors and financial institutions to effectively supervise, monitor and evaluate the investment of the Holzmanns’ assets.

Risk Tolerance
The Holzmanns wish to take a balanced/preservation stance with regard to the investment of this portfolio. In establishing the risk tolerance of the IPS, the ability to withstand short and intermediate term variability was considered. The Holzmanns’ prospects for the future, current financial condition, and other factors suggest collectively that some interim fluctuations in market value and rates of return may be tolerated in order to achieve the longer-term objectives. The Holzmanns’ overall “legacy plan” objectives have been taken into consideration in developing this Investment Policy Statement.

Time Horizon
The recommended investment strategy is based upon an investment horizon that will vary from year to year. Over the short-term both stock and bond markets can be expected to be volatile. Historical one-year returns for the U.S. stock market have varied from positive 53% to negative 43%. One-year returns for U.S. bonds have varied from positive 44% to negative 8%. The Holzmanns understands the volatility of returns in the short-term and have agreed to view cyclical fluctuations with the appropriate perspective.

Asset Allocation Guidelines
The following guidelines are established based on the Holzmanns’ long-term financial situation. As such, the target asset allocation can be viewed as a strategic (long-term) asset allocation rather than a tactical (short-term) allocation.

As of: 12/9/2008	Target Percentage	Target Amount	Permitted Range
U.S. Large Cap Equities	37%	$ xxxxxx	30 to 44%
U.S. Small Cap Equities	9%	$ xxxxxx	7 to 11%
International Equities	19%	$ xxxxxx	15 to 23%
Real Estate	5%	$ xxxxxx	4 to 6%
Fixed Income	30%	$ xxxxxx	24 to 36%
Invested Subtotal	100%	$ xxxxxx
Cash, CD’s & Equivalents		$ xxxxxx
Preservation Subtotal		$ xxxxxx
Total		$ xxxxxx

Portfolio Rebalancing
Over time, each asset class may build up to the maximum point within the permitted asset allocation range. Portfolio allocations will be monitored to assure that allocations remain within the permitted range, relative to current allocation needs. The portfolio will be rebalanced to its target allocation as needed. A significant portion of the total portfolio will be held as the “preservation” portion in cash and equivalents (this amount will be re-defined frequently, as needs demand).

Performance Measurement
Time-weighted rate of return measurements will be made at quarterly intervals for the portfolio as a whole and for each separate asset class. Rates of return will be compared to relative indexes for each asset class to assure that performance remains within acceptable ranges.

Evaluation benchmarks for each asset class are as follows:

• U.S. Large Company Stocks – S&P 500 Index or Russell 1000 Index
• U.S. Small Company Stocks – Russell 2500 Index or Russell 2000 Index
• International Equities – MSCI EAFE Index
• Real Estate Investment Trusts – NAREIT Global REIT Index
• Hedge Funds – Specific Target Return of Provider Over a Market Cycle
• Specialty Funds – Appropriate Sector-Specific or Other Index and Peer Group
• Intermediate-Term Bonds – Barclays Aggregate Bond Index
• Short-Term Bonds – Merrill Lynch 1-2.99 yr Treasury Index
• Cash Equivalents – Salomon Bros. 3-month Treasury Bills

Duties & Responsibilities
Legacy Planners
Legacy Planners are responsible for assisting the Holzmanns in maintaining the appropriate allocation for the Holzmanns’ investment portfolio based on the particular needs, objectives and goals, and risk temperament of the Holzmanns. Legacy Planners will be available on a regular basis to discuss the portfolio with the Holzmanns and also conduct periodic reviews of the portfolio with the Holzmanns and their other advisors to determine if the asset allocation remains suitable. Your Legacy Planners will guide your investment advisors and financial institutions in:

1. Presentation of investment results in light of stated objectives.
2. Discussion of current investment strategies for the portfolio.
3. Communication of material changes in policy, objectives, staffing or business condition of the investment manager.
4. Review and reappraisal of the investment objectives.

The Holzmanns
The Holzmanns are responsible for providing all relevant information on financial condition, net worth, and risk tolerances, and must notify the Legacy Planners of any changes that could materially affect the investment strategy. The Holzmanns should read and understand the assumptions outlined in this Investment Policy Statement and understand their portfolio’s asset allocation and the risk/reward relationship of that allocation. The Holzmanns should read all materials sent to them by all advisors to assure they stay abreast of changing conditions and policies affecting their portfolio.

Adoption of Investment Policy Statement
I (we) have reviewed, approved and adopted this Investment Policy Statement.

_________________________ Investor’s signature	____________   Date
_________________________ Investor’s signature	____________   Date
_________________________ Legacy Planner	____________   Date
_________________________ Legacy Planner	____________   Date

Our legacy planners wanted us to approve this draft before we handed it to our investment advisor.

I read it through once, called them up, and said I didn’t feel comfortable signing such a document without further input . . . from our investment advisor himself and, perhaps, one or two other similar advisors.

–I’ll try to discuss that issue in my next post.

 |  Email This Post  |  Print This Post  |  Subscribe to It!
This entry was posted on Monday, March 16th, 2009 at 10:50 pm and is filed under advisors, estate planning, investment, legacy planning, professional services, wealth. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.