Investment policy statements (IPSs), viewed as protective by some advisors and potentially hazardous by others, are getting more attention in this transformed market.

An IPS is a document that explicitly outlines the goals and philosophy of investing for a given client, setting general preferences. Users regard IPSs as an effective tool for keeping planners and clients on the same page, guiding the planner's efforts and keeping the client's expectations reasonable and realistic. Now that the markets are in turmoil, there's more focus on the rationale underlying IPSs.

Many planners use IPSs with certain of their clients, particularly institutional, high-net-worth or highly argumentative clients. Few, however, use IPSs with the majority of their clients, especially when times are good.

"Whenever you have a really good market, people don't tend to look at the details," says Blaine Aikin, chief executive officer of fi360, a financial services consulting firm near Pittsburgh that provides planners with a web-based tool that generates IPSs.

In a down market, however, "it's easy for people to lose sight of their objectives and remember things differently if they aren't written down," says Wayne Badorf, national sales manager for Wells Fargo Advantage Funds. "It's very easy for clients to lose track of what they wanted to do in a market like this one."

While advocates stress the advantages of having a document on hand to remind the client of what they bought into, critics believe that IPSs can cause as many problems as they might solve. Some planners find them too time-consuming, cumbersome and limiting.

"It's not a legal requirement to have an IPS, and they can be quite lengthy and exhausting," says Andrew Orr, president of the Orr Group in Orlando, Fla. "A lot of the elements of an IPS can be really constricting when, frankly, the planner needs to have room."

Double-Edged Sword

Moreover, some planners fear that an IPS would expose them to legal liability. "I worried that keeping up with the requirements set out in an IPS for hundreds of accounts would be a liability issue," says Randy Ruggaard, president of Ruggaard & Associates in Twinsburg, Ohio. "To keep 400 accounts in compliance with those things would be a struggle.

Ruggaard's concerns are by no means groundless, says Stephanie Monaco, a compliance attorney with Mayer Brown in Washington. "If a planner is worried about liability, half of the time it's probably better to have an IPS, and half of the time it's better not to have one," Monaco says. "If you are a planner who's slavish about sticking to what you say you're going to do, then it's probably a good idea to have an IPS. If the client follows the planner's advice, but still loses money, the planner can then say, 'Look, we did what [we agreed] we should do.'"

However, she adds, if a planner is not so meticulous about executing the approach set down in an IPS, "then it would be better not to have one because if the client loses money, at least you don't have something contradictory in writing. That's devastating. That's a terrible situation."

Regardless, Ruggaard believes an IPS may be useless in a rapidly changing market. "Sometimes you think you know what clients want, and they think they know what they want, but this has been a year of true discovery," he says. An IPS may be little use, he adds, in helping clients "who went from wanting 60% percent in equities to 100% in cash."

Linda Lubitz Boone, president of Lubitz Financial Group in Miami, and husband Norman Boone, president of Mosaic Financial Partners in San Francisco, co-own IPS AdvisorPro, a company that sells software that helps planners generate IPSs. Naturally, both Boones are strong advocates for the documents.

"We think it is a best practice—and important investor protection," Norman Boone says. "Investors deserve [clarity on] what may happen to their money, and they need a vehicle to accurately record their wishes."

Yet Linda Boone says these statements won't work with clients who won't discuss them at some length. "If they won't put the time and effort in, they're not going to be responsive clients, and I don't need them. The liability is just too high," she explains.

What to Include

Experts say those who choose to use an IPS—in any market—should work with their attorneys to ensure that their documents:

• Emphasize risk. "Presumably everyone knows how bad things are [in the financial markets], but I think you can't take the chance that they don't," Monaco says. "Talk explicitly with clients about the risks they take with their particular investments.