Personal Finance

Ontario’s securities regulator wants investors to start off with a clear portfolio-building plan.
By Jess Morgan | 01/06/15

Every investor starts out with the same basic goal: to make money. But what do you hope to make money for? How much risk are you willing to take on to do it? And how much did you learn about investing before you decided to try it for yourself?

About the Author
Jess Morgan is the associate editor of Morningstar Canada’s website. She began her career as a television producer and freelance writer, often making appearances on TV and radio as a commentator on politics and culture. She holds a BA in communications from the University of Winnipeg and a diploma in Creative Communications from Red River College.

The Ontario Securities Commission (OSC) wants to make sure you can answer these questions before you start buying. It launched an online tool, Your Investment Policy Statement Blueprint, to help new investors create a crucial document -- the Investment Policy Statement (IPS). This document lays out the investor’s objectives, risk tolerance and investment style, providing him or her and the advisor with a starting point when they first discuss how to build a portfolio.

The Blueprint is the first major initiative from the OSC’s Office of Investor Policy, Education and Outreach, created in April 2015 as a merger between the organization’s Investor Education Fund (IEF), its resource arm, and the Office of the Investor, its advocacy arm.

“The OSC is focusing on advancing investor protection and support to retail investors by expanding investor engagement, education and outreach,” says Rhonda Goldberg, the Office’s acting director. “This includes obtaining a better understanding of investor issues and needs through targeted research, seminars and roundtables.”

To get started on the Blueprint, potential investors indicate the following in a questionnaire on the OSC’s website:

  • their level of investment knowledge and experience;
  • their reliance on their financial advisor;
  • their expected annual taxable income;
  • their investing goals (i.e. retirement or major purchases) and the span of time in which they hope to achieve those goals;
  • their tolerance for losses;
  • their willingness to borrow for investment capital;
  • their favoured investment vehicles;
  • the kinds of assets they prefer to hold;
  • how they plan to respond to losses of varying percentages; and
  • how often they expect to hear from their advisor.

Once investors complete the questionnaire, they receive a PDF report summarizing their answers, as well as space for contact information for anyone else, such as advisors and spouses, who should receive a copy of the IPS they will draft later.

“An IPS is a helpful tool for your advisor to have in addition to the ‘know your client (KYC) form,’ which your advisor is required to fill out,” the report notes.

Besides helping advisors know what to recommend to their clients, another goal of the Blueprint is to hold Canadian investors back from making investment decisions based on emotion. According to the OSC’s 2014 Canadian Money State of Mind Risk Survey, more than half of respondents have bought or sold out of worry and wished they hadn’t afterward.

“By having an IPS in place,” the OSC says in a news release, “investors can avoid making fear-based reactions that they may later regret.”

The IPS has other advantages, according to Florida-based wealth managers Linda Lubitz and Norman M. Boone, who first wrote about the concept in 1992: “A properly written investment policy statement can be critical in minimizing the legal liability of a qualified plan's trustees, communicating to all relevant parties the procedures and investment philosophy of the plan, and providing guidelines for investment decisions.”

Since Lubitz and Boone’s oft-cited article was published in the Journal of Financial Planning, it has become a best practice within the North American investment industry to assist all clients in writing an IPS, whether the advisor’s jurisdiction mandates it or not.

The IPS is not mandatory in Ontario, but the OSC has referred to it as a best practice. The organization encourages portfolio managers to discuss a client’s IPS on an annual basis and to confirm with a signature if any changes need to be made, or if the existing IPS will remain valid for another year.

“The IPS Blueprint is not intended to replace the advisor's role or the advisor's obligation to know their client,” says Goldberg. “Rather, it's intended to be a tool that can assist both investors and advisors in their discussions.”

The OSC also notes that while institutional investors frequently use the IPS as a foundation for their long-term investment decisions, it is less popular among retail investors, which they hope the Blueprint will change.

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