THE STATEMENT OF INVESTMENT POLICY
The Investment Process and How an SIP Fits into It.
Initial discovery: this allows both the client and the advisor to learn about one another. This might include learning about the client’s circumstances, goals, income needs, restrictions, current holdings, risk tolerance, etc. The client should also attempt to learn as much as possible about the investment manager’s investment philosophy, practices and procedures.
Discussion and agreement: All the issues related to what is to happen between client and advisor should be placed on the table. Eventually the client and advisors need to come to agreement on issues such as the investment goals, degree of client involvement, the asset allocation to be used, the kinds of instruments to be utilized (or not), needs for liquidity or income, investment restrictions, investment methodology and responsibilities of each party to the other.
Creating the SIP: Once the agreements have been reached on the full list of issues and policies to be followed, they need to be recorded. This document will become the SIP which is signed by both parties as acknowledgment of the agreements.
Until there is agreement between the advisor and client about the policies to be followed, no investment trades can responsibly take place. Once the SIP has been signed by all parties, the initial and on-going trades can be implemented according to the road map provided by the SIP.
MONITORINGIt is very rare that a portfolio stays as originally structured. The SIP should describe how the portfolio will be monitored for poor performers, how good performers will be identified, how (if any) re-balancing will be implemented. It should address any other ways in which the investment manager will try to ensure that the portfolio will stay in line with the objectives set forth in the SIP.
It’s a document that systematically reviews the objectives, constraints and strategies that should guide fund management of client’s portfolio.
It the road map, an activity schedule and outcome document between a financial advisor and a client.
Overally, a SIP is a client’s specific document designed to address the objectives, constraints, unique circumstances and overall procedures that govern fund management and client’s portfolio.
THE NEED FOR A SIP
It acts as both a roadmap to investment success and a barrier to the kind of bad investor behaviour.
The presence of an SIP helps to create an environment of transparency in the relationship between client and advisor. Clients have an opportunity to understand the reasons why each action is to be taken as per the periodic reports hence reduces chances of misbehaving.
It offers clients a better understanding of what to expect from their advisor. That clarity generally helps to build a much higher level of trust and respect
It helps ensure the investment manager is aware of the expectations of the client.
It enables smooth takeovers in cases of management shifts or transfers
It acts as a referral document in cases of disputes
Some general components covered in the SIP
1. All key factual data about the client, including where the client’s assets are held, the amount of their assets under your management, and the identification of the trustees or interested parties to the account. This can be as detailed or as simple as desired.
2. A discussion and review of the client’s investment objectives, investment time horizon, anticipated withdrawals or deposits, need for reserves or liquidity, and attitudes regarding tolerance for risk and volatility.
3. Any constraints and restrictions on the assets, such as liquidity and marketability requirements, diversification concentrations, the advisor’s investment strategy (including tax management), locations of assets by account type (taxable versus tax-deferred), how client accounts that are not being managed (if any) will be handled, and any transaction prohibitions.
4. The security types and asset classes to be included in or excluded from the portfolio, and the basic allocation among asset categories and the variance (rebalancing) limits for this allocation.
5. The monitoring and control procedures and responsibilities of each party.
The presence of an SIP helps to clearly communicate to all relevant parties the procedures, investment philosophy, guidelines and constraints to be adhered to by the parties. It can be seen as a directive from the client to the investment manager about how the money is to be managed, but at the same time providing the guidelines for all investment decisions and responsibilities of each party.