Some investors worry that switching to a portfolio manager with this level of discretion could
make them lose touch and/or control of their investments. But several safeguards can be implemented to help put parameters around this discretion and keep investors in the driver’s seat. The
steps below outline some of these safeguards.
Five steps to safeguarding your investments:
1
2
The second step is to ensure that accurate investment objectives and risk tolerance are
documented for each investment account. As an example, one of your accounts could
have a combination of the following risk tolerance levels: 30% low risk, 50% medium
risk, and 20% high risk. These percentages set the parameters within which the PM will
manage the investments.
3
The third step is to create an investment policy statement (IPS), which documents the
parameters for your PM and provides some constraints/limits around their discretion.
Designed to provide clarity and guidance in the investment decision-making process,
the IPS lists a detailed description of each individual account, including the investment
objectives, which may range from preserving capital to maximizing growth. Essentially, the IPS
documents the willingness to take on risk and accept market fluctuation. It also documents
any income requirements, whether monthly or other lump sums—information that helps
map out liquidity needs.
In the majority of cases, the IPS also looks at all the individual accounts combined. The
total household value is included, and the client determines a strategic asset mix for the
household. An example of a household strategic asset mix is 10% cash and equivalents, 30%
fixed income, and 60% equity. Also documented are the asset mix guidelines—essentially the
minimum and maximum levels within cash and equivalents, fixed income, and equities. In
terms of equities, for example, the IPS could state that there’s a minimum of 50% and a
maximum of 70%.
Finally, the IPS can also list unique preferences. If you don’t want the PM to invest in certain
types of companies—such as weapons or tobacco manufacturers, for example, or companies
operating in oilsands—this can be stipulated in the IPS. The IPS can also state areas to
strategically overweight if desired. Additionally, for those individuals who are restricted in
terms of the types of investments they can own, the IPS can be set up to document suitable
investments that are not in conflict, such as exchange-traded funds.
4
5
An additional step for
aging couples
Although setting up a managed account requires more work in the initial stages, it can
increase efficiency significantly, both now
and for the rest of your life. You can be free to
work hard and earn income without having
to commit time to researching investments.
You can spend time travelling and doing the
activities you enjoy without worrying about
missing an important phone call.
And for aging couples, there is an additional
factor to consider: In many cases, one spouse
makes all the financial decisions for the
household, and has done so for years. If that
individual passes away first, it can be very
stressful for their surviving spouse to suddenly
have to make investment decisions. I recommend that couples who face this potentiality
meet with a PM to create a contingency plan.
This is all the more important given that
investing is now more complex for seniors. In
years past, it was easier for aging clients to
arrange their investments—clients could simply put funds entirely in bonds and GICs
and obtain a sufficient income flow. With today’s interest rates near historic lows, those
days appear to be gone.
The fourth step is to monitor your investments. Technology has made this step easier—
in addition to reviewing your monthly statements, you can now track the activity and
performance of your PM online. Reviewing changes as they occur will enable you to
react quickly if you have any concerns.
The fifth step is to ensure that the IPS is updated periodically. Review the document
at every meeting, and modify or update the document every time you experience
a major life event or there’s a significant change in your circumstances.
CPABC in Focus • Nov/Dec 2015 41
Max Oppenheim/Digital Vision/Getty Images
The first step is always to have a clear discussion with your PM. In the finance world, this
is referred to as a “Know Your Client” discussion. The PM will make a detailed analysis of
your financial resources, needs, goals, risk tolerances, and personal preferences, and this
analysis will help determine which investments are suitable for your current needs, your
retirement needs, and your estate needs.