It was inspiring to read Louis Harvey’s (head of Dalbar) article “Using IPS to Deliver a Superior Standard of Care” yesterday because it highlighted the need to take a more active approach to asset allocation (and investment oversight).

Here is the article   

A Prudent IPS Will Chart Prevailing Conditions

The investment policy is the guiding principle that is generally accepted by investment products, managers and advisors. The IPS is an essential part of deciding investment selection and monitoring. The IPS translates client needs and goals into guidance for investment decisions. Since clients cannot reasonably be expected to have the expertise for this translation, the investment manager or advisor (“Expert”) is expected to take on this responsibility.

It stands to reason that prudent investing requires a prudently prepared investment policy. Such prudence requires that the Expert act on available information in developing or recommending an IPS. The IPS must be reflective of changing conditions in the investment universe and with the client.

Unfortunately, the usual practice today has been to establish a rigid investment policy and then to treat failures of such policies as aberrations. When applied to investment product policies, this rigid structure remains viable for as long as investment conditions remain static and has the advantage of facilitating comparisons among products. On the other hand, clients holding such products suffer when foreseeable conditions change.

Applying a rigid investment policy to individual portfolios and to retirement plan lineups is convenient and defensible since the “story” does not change and a simplistic argument can be used to justify failures. The effect is investors are made to suffer otherwise avoidable conditions.

Continue reading here.

Conclusion

While it is a clear that a superior standard of care requires monitoring of prevailing circumstances and updating investment policies as appropriate, the actual response may vary. There is likely to be no established precedent for what to do, thus requiring expert judgment in many cases. The way a policy is adapted to changing circumstances should be based on reasonable courses of action.