Investment Objectives Section of an IPS

Background and Investment Objectives

Background items commonly include the client's name and age, as well as relevant personal and financial information. Filling out this section helps the wealth manager gain an understanding of the client's investment objectives. Common objectives include funding support for:

• Retirement and lifestyle.
• Family members.
• Funding philanthropic activities.
• Bequest goals.

These examples typically represent ongoing objectives. By contrast, one-time objectives are also typically included in this section. It is common for private clients to have multiple, competing objectives that they seek to achieve with the same portfolio.

Investment objectives should be detailed and quantified whenever possible. For instance, a client who is about to retire may seek to withdraw a specific amount each year that increases with the annual rate of inflation. This quantification adds much-needed clarity to the wealth management process. By comparison, oversimplified investment objectives such as “growth” or “growth and income” would not be sufficiently detailed.

Expected Cash Flows and Capital Sufficiency Analysis

The wealth manager should also include in this section of the IPS any other cash flows that are linked to investment objectives and that will therefore affect the capital sufficiency analysis. This could include necessary contributions into the portfolio in order to achieve the plan or an anticipated inheritance or sale of a business.

The investment objective, when linked to the client's asset allocation and the wealth manager's capital market assumptions, should provide the basic inputs to a capital sufficiency analysis. Whenever the capital sufficiency analysis does not support the investment objective, the wealth manager must work with the client to establish a revised objective that the manager judges to be achievable.

As part of the overall client background, the IPS should include the market value of the portfolio and of the accounts that make up the portfolio. The wealth manager should classify the tax status of the account as either:

• Taxable.
• Tax-deferred.
• Tax-advantaged.

Question

The following should all be included in the background and investment objectives section of an IPS:

1. Capital sufficiency analysis.
2. Market value of current portfolio.
3. Statement of client risk tolerance.

Solution

The correct answer is C.

Client risk tolerance has its own section within the IPS.

A and B are incorrect. The other two items are both sections of the background and investment objectives. Both help give a high-level view of where the client is currently at financially, and what will be needed to either improve (or maintain) this financial situation in accordance with client stated objectives.

Portfolio Construction: Learning Module 4: Overview of Private Wealth Management; Los 4(j) Prepare the investment objectives section of an IPS for a private client