Morningstar Advisor - Summer 2007 - (Page 21)

No Two Clients Are Alike The key to recommending suitable investments is knowing each client’s profile. by Joel P. Bruckenstein While most financial service firms are structured to profit from their handling of client accounts, in the end, clients should come first. This is the basic premise behind investor suitability. Clients should be making investment decisions that match advice with their risk tolerance and investment goals. The dark side of suitability is highlighted in recent regulatory crackdowns of broker-dealers acting in their own interest rather than their clients’. Or perhaps advisors simply didn’t fully understand the investment they were recommending. Today’s products, especially variable annuities, are increasingly difficult for even a seasoned professional to understand. And keeping up with regulatory changes is a full-time job, not relegated just to a firm’s registered principal or compliance department. A further complication is that there is no one-size-fits-all suitability solution. Every recommendation an advisor makes must be tailored to each client’s unique profile. So what is an advisor to do? An important step is the creation of an investment policy statement (IPS) that the client signs. An IPS explains the relationship between the advisor and client. It should include the client’s goals, investment procedures, and the responsibilities of both the advisor and client. “The preparation and maintenance of each client’s IPS is one of the most critical functions performed by the investment advisor,” says Don Trone, founder of Fiduciary 360, a fiduciary organization for advisors in Sewickley, Pa. An IPS plays a vital role in helping the advisor understand the client and in building a trusting relationship. It’s a chance for advisors to ensure that their perception of a client’s profile matches the client’s perception. “An investment policy statement does not guarantee that what is written down is suitable, but it does give the client the opportunity to read and understand what is being done on his behalf,” says San Francisco planner Norm Boone, CFP. But compliance attorney Thomas Giachetti, chair of the Securities Group at Stark & Stark in Lawrenceville, N.J., urges caution. “Too many advisors make IPS errors that can expose them to liability,” Giachetti says. “Make no mistake; an advisor will have to defend both the IPS and the actions taken under the IPS if sued.” Both Giachetti and Trone say the challenge is keeping it simple. The IPS must be understandable to the client, yet it needs to be flexible enough for the advisor to deal with changing market conditions. “The investment guidelines have to be specific to establish the parameters of the investment process, yet provide enough latitude so as not to create an oversight burden,” Trone says. Amy Ost, CFP, a Morningstar product development manager, says she has seen in an increase in demand from advisors for Webbased tools that create customized IPSs. Morningstar Advisor Workstation offers such a tool. So does Boone’s firm, IPS AdvisorPro. Once you create an IPS, treat it as a “living” document. “Some advisors create these documents and forget about them,” Giachetti says. “That can lead to enhanced liability.” K Joel P. Bruckenstein, CFP, is publisher of Virtual Office News and contributes to MorningstarAdvisor.com MorningstarAdvisor.com 21 http://MorningstarAdvisor.com http://MorningstarAdvisor.com

Table of Contents Feed for the Digital Edition of Morningstar Advisor - Summer 2007

Morningstar Advisor - Summer 2007 Contents Letter from the Publisher Get to Know the Bond “All-Stars” Research Briefs Our Stewardship Test Gets Tougher Save It for Later Too Many Oranges Best of Both Worlds No Two Clients Are Alike When It Comes to VAs, It’s Seller Beware Hands On: Finding the Suitable Fund Share Class for Your Client Fund Style Can Drift Off Course Sticking to Their Style, Through Thick and Thin Marathon Man Growth, With a Chaser A Menu of Ideas to Fill Five Market Baskets Funds: Finding Funds with Conviction Stocks: So You Say You Want Income? All Eyes on China Mutual Fund Analyst Picks Undervalued Stocks Most Popular Variable Annuities What’s New at Morningstar and on the Web The Advisor’s Economic Moat

Morningstar Advisor - Summer 2007

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