Imagine being lost in the mountains without a map or a compass. What a scary thought, not knowing where you are, where you’re going, or how much energy it will take to find safety. Thankfully, most of us don’t put ourselves in those situations because of the potential dangers, and we’ve all heard the stories.
The investment world is a little like being in the mountains. There are plenty of directions we can go, and there are lots of ways we can get lost. We may not use compasses to navigate the markets, but, just like the mountains, it’s a good idea to have a plan and a map. Because the potential dangers are out there, and we’ve all heard the stories.
We work with charitable organizations, retirement plans, institutions, families, and individuals throughout the year, and before venturing into the markets, we can prepare for the journey by creating an Investment Policy Statement (IPS). That may sound like a dry, clerical term, but its anything but mundane.
In the investment world, an IPS is like a map and a plan, and it helps the client and investment advisor have a clear understanding of financial goals, objectives, and risk tolerances from the beginning. The IPS is a long-term document that can live on through the different phases of life. Needs evolve and an IPS can evolve with them, but the foundational values and objectives often remain the same and can be passed down from generation to generation.
For example, an IPS might explain your reason for investing, and how much money you would like to invest each year. The document might identify what you want to accomplish through your investments, and an IPS might even list your top five money goals, such as eliminating debt, saving for retirement, funding charitable giving, paying for college or covering other life events, like weddings.
Goals like these aren’t always easy to reach. They require patience and perseverance, sort of like climbing a tall mountain. Think of an investment advisor as a trail guide and the IPS is like an instruction sheet from the hikers. The sheet might say, “We want to hike up Mt. Evans and we want to get to the summit and back in three days. We don’t mind walking across creeks, but we don’t climb rocks.” That gives the trail guide a better idea of the hikers’ objectives, and what their risk tolerances are, so they can plan a route to achieve a successful journey.
Along with understanding risk tolerances and objectives, the investment advisor’s role is to watch out for the client’s best interests. The investment world is full of dead-end trails and risky terrain. That’s why advisors are important. They know the landscape and can hold clients accountable, helping investors identify hazards and stay on course toward their financial goals. Conversations can be difficult and what an advisor says may not be what you want to hear. That’s why you shouldn’t hire just any individual to be your investment advisor.
Rather, look for an advisor with a clear vision and a tight focus, someone who is required by law to act in their clients’ best interest. There are a growing number of them, so they’re not hard to find, and in the financial industry, they’re called fiduciaries. Just like any good trail guide, they don’t leave home without a map and a plan.