Your Financial Profile and IPS

Posted By: Advisor Analyzer Team

In our society, we have official profiles and records that document every facet of our lives.  In medicine there are medical profiles, the legal system a criminal profile.  We have internet profiles, employment profiles, profiles for driving or credit worthiness and so on.   Needless to say, the art of profiling is a universally applied practice in many industries.

 

Of course, the main benefit of maintaining a profile is it allows us to effectively distinguish one individual from another.  A patient’s chart provides critical information to doctors that can mean the difference between life and death.  Without pertinent information on allergies, past treatments and medications, doctors are prone to easily avoidable errors with drastic consequences.  Thankfully, the medical industry maintains up to date information on most patients avoiding such potentially catastrophic events.

The Industry's Practices

Most investors would assume a similar program is utilized in the world of finance.  Unfortunately, most investors would be wrong.  Sadly, there exist informational inefficiencies that often leave the responsibility to create and maintain a financial profile with the investor.  Far too often, investment goals and preferences are ignored or outdated.  So your advisor may be using obsolete information to guide your current investment allocation.

 

To make matters worse, when a client decides to change advisors, there is little information exchanged between the former and new advisor.  The old advisor may have invaluable information regarding your financial background that will never be relayed to the new.  When all’s said, many investors are left to fend for themselves in providing detailed financial background information to a new advisor.

How an IPS Can Help

As a word of advice, investors should maintain an Investor Policy Statement (IPS).  The IPS is an annually updated report containing relevant profile information to be relayed to any advisor they employ.  It details your situational profile, investment objectives and constraints: basically, every aspect of your financial background.  It may also include information on your psychological attitude towards gains and losses, the purpose of the funds, and other specific information differentiating you from the next guy. 

 

Much like our personal lives, our investment objectives and constraints evolve overtime.  The goals you envisioned ten years ago may or may not be the same goals you hold true today.  Advisors are not mind readers (although some may claim otherwise), and frequent communication is essential to ensure both you and your advisor are in sync.  The more information an advisor has regarding your financial background, the better equipped he is to find suitable investments. 

Conclusion

As with any industry; there are good and bad advisors.  A good advisor will always be aware of your financial profile when making any investment suggestions.  An advisor who recommends an investment without determining who you are, where your funds came from, and where you’d like to see your funds is like a doctor who never took the time to know your allergies or current medications.  The last thing any investor needs is unsuitable investments in their portfolio, and the IPS is an effective means to prevent such mishaps.