How to Create a Financial Policy Statement

When I was a Financial Advisor, process ruled. After meeting a new client and exchanging the typical introductory small talk about sports, children, or current events, we would start to discuss why they came to see me. Sometimes I had called them first and they wanted to gauge my value, but more often they had come to me for specific help or guidance. Regardless of how they ended up in my office, I always asked the same initial questions to understand their current situation and what they wanted to accomplish. Of all the questions, one was most important:

“What specifically are you looking to accomplish?”

This question often set the tone for the meeting and gave me a lot of insight into the type of individual and investor I had in my office. More often than not, I had to repeat the question or rephrase it to get at what I really wanted to know which was “Do you, Mr. or Ms. Client, have any idea of what you actually want?”

The reason this was so important is that specifics matter. If you want to accomplish something you have to define it, understand it, investigate it, and pick it apart to its deepest level. If you don’t know what you want, you will never get it and in my role as an advisor, I didn’t need clients waffling on their goals, only to end up frustrating us both in the end.

Let's use golf as an example:

“What specifically are you looking to accomplish?”

Goal: I want to drive the ball better.

Ok…but what does that actually mean? Do you mean further? Or straighter? Or more consistently? Do you want to be better with your Driver only? Or anytime you hit from the tee?

Obviously, most people want all of the above, but those are still multiple goals that most likely require numerous separate strategies to achieve each of them effectively. So if that's the case, which is your biggest priority and why?

You can see how specifics are critical to defining and shaping your approach because if you haven’t thought about these things yet, and only start thinking about them in your golf coach’s (or financial advisor’s) office you may not get very far with your meeting.

Set Your Guiding Principles

For those clients that invested with me, we would mutually define a policy statement that would outline the rules and objectives for specific accounts that were under management. However, for all my clients I encouraged them to create for themselves a Financial Policy Statement, a document that outlined their goals, philosophy, and strategy for not only their investments but their broader financial ecosystem. Often this led to a deeper and more complicated conversation about what their money meant to them and how they thought about a long-term legacy. Not once did a client tell me it was a waste of time.

Can you, right now, explain in a few short sentences what your financial philosophy is? How do you define your investment strategy? Have you measured and tested the constraints of your plan? If you can do those things, have you actually written them down?

Now is your chance! Below is a high-level summary of what I consider the five main sections of a Financial Policy Statement. This is yours, so make it your own, and most of all make it useful so you can keep yourself accountable.

  1. Identify and quantify your goals: This may be one overarching goal or multiple goals encompassing portions of your financial assets. You decide, but make sure each account and each asset is linked to a specific, measurable goal with a defined timeframe

  2. Define your investment strategy: Asset allocation, asset location, contribution targets, growth targets, buy and sell triggers, position limits, style-specific constraints etc. The more specific the better. When you review and refine this in the future, you will have clear ideas of where you have deviated from your plan and whether your plan worked as you wanted it to.

  3. Document your current investment/assets: How does #3 compare to #2? Address accordingly.

  4. Create a monitoring plan: Who monitors what? If you don’t work with an advisor, the answer is you. How will you adjust and when will you adjust your portfolio when it deviates from your initial allocation and investment targets?

  5. Written explanation of your strategy to a third party: Why are you doing things a certain way? If you could no longer manage your portfolio, could someone pick up where you left off with only this document? If not, start at #1 and revise. If you can’t explain it, or someone else can’t follow it, consider if this is really the best strategy for you.

Good luck!

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