One simple tool – an investment policy statement – can vastly improve just about everything planners do for their clients, says John Nersesian, managing director of Wealth Management Services at Nuveen Investments.

“There are only two characteristics that wealthy clients are looking for from their advisors,” Nersesian told attendees at the Advanced Personal Financial Planning Conference sponsored by the American Institute of CPAs in Las Vegas. “The first one is competency. The second thing … is empathy…. One of the reasons that I find investment policy statement creation useful is … it’s about understanding what’s important to the investor.”

Nersesian challenged conference attendees to conduct an exercise in which they identify their top clients, their assets under management, as well as well as their close family members and other advisors. Most, he guessed, could produce those answers off the tops of their heads.

But, could they name the two things that keep those clients up at night or name their top goals? he asked.

Not many planners can answer the latter questions readily, Nersesian says. But taking the time to work with clients to write up an investment policy statement with clients will give planners that information, while accomplishing several other important goals at the same time, he claims.

First off, Nersesian cites a study showing that those clients with investment policy statements produce higher returns overall.

In addition, as the financial services industry evolves to a fiduciary model, the statements provide a means for planners to demonstrate, in detail, how they are executing their fiduciary duties, he says.

An investment policy statement spells out the game plan of an investment management program, according to Nersesian. It also provides the explicit linkage between a client’s long-term investment objectives and the daily work of the planner.

According to Nersesian, it further: serves as the cornerstone of a true advisory relationship; minimizes – hopefully – emotionally driven decision-making; establishes benchmarks to help monitor investment performance; and provides a “paper trail” of policies and procedures for managing investment decisions.

The components of each statement will differ depending on whether or not the client is a high-net-worth individual or trust, a foundation, nonprofit, defined benefit plan or defined contribution plan, according to Nersesian.
Most will include a mission statement, goals, strategies, tactics and tools, he adds.

They should also include the roles and responsibilities of all parties to the policy, from the advisor or custodian to the family members, investment committee or board of trustees, he says. A procedure for measuring risk tolerance and performance using agreed-upon benchmarks is a particularly useful ingredient, according to Nersesian.

To illustrate why, he asked his audience which benchmarks their clients typically use to measure their performance annually.

“It’s not the S&P 500,” he said, answering his own question. “It’s whatever did really well last year…. Don’t let [clients] selectively choose the benchmark that they will measure their success against.”
The value of the policy is not the document itself, he added, it’s the process that goes into creating it and continuing to use it with clients on an ongoing basis.

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