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Managed Accounts: Getting Past No

The investment policy statement is a great tool for convincing wary investors that moving their managed accounts money to you is in their best interest.

Bear markets move money. It's the silver lining in tough economic times — but only for those advisors able to get past the defenses put up by abused and wary prospects.

Shell-shocked investors seek refuge with advisors offering process, not products, and advisors who can communicate best on this level are the most likely to reel in new managed account business. In this regard, there is no more valuable tool than the Investment Policy Statement (IPS). Handled properly, the IPS and the questionnaire leading to its creation can help clarify your clients' financial goals, while simultaneously revealing their greatest fears.

What follows is a list of ways to harness the power of the IPS, using its primary components as a guide.

  1. Information Gathering: Yellow Pads Will Do

    You don't need a bulky notebook to help you connect with a prospective client. Start with the basics. “Tell me how you've achieved your success,” is a fine icebreaker, because it is likely to get the client talking expansively. “What forces might get in your way of achieving your goals?” is a good follow-up.

    The answers form the basis of your client's investment policy, yet they are far removed from the nitty-gritty: the selection of investment managers or the rebalancing of accounts.

    My friend and colleague, Leo Pusateri, says it best: “Business is first a meeting of the hearts, then it becomes a meeting of the minds.”

  2. Setting the Investment Goal: Find the “Sweat Point”

    Account values rise and fall with the markets, but major expenses do not wait for a rebound. Your clients or prospects might lament the drop in stock prices, but what is their real concern? What can they no longer do — or pay for? Probe their fears.

    Our survey of over 1,500 millionaire households says “quality of life in retirement” is the No. 1 concern, followed by saving on estate taxes and paying for long-term health care. While these issues are not directly related to selecting investment managers, they provide the vital foundation for your credibility in providing investment services.

  3. The Numbers: Performance is Personal, Risk is Relative

    The bear market has provided a lifetime of risk education, and you can benefit from its teachings. Use the stock market train wreck to show prospects — and existing clients — the benefits of diversification among different manager styles and asset classes. The IPS should reflect a risk-adjusted potential result relative to alternative investment choices.

  4. Act Like an Institution: The Rewards are Clear

    According to Mercer Investments, for the 10 years ending Dec. 31, 2002, the mean annualized return of public pension funds was 8.6 percent, while corporate funds earned 8.1 percent, and the mean endowment/foundation account gained 9.1 percent per year. Returns like these were pooh-poohed by investors in 1999 and early 2000, who were chasing dot-com rainbows. Drive home the value of a diversified investment process while the calamity is fresh in your prospects' minds.

  5. Time Horizon: Long-Term Investors Only, Please

    Fearful investors may try to keep you on a short leash by claiming a three to five-year “market cycle” time horizon. Don't take the bait. Over 40 percent of people who live to age 65 will live to 90 by the middle of this century, compared to 25 percent in 1980, according to Age Wave, a San Francisco-based market analysis firm. Further, one-in-three millionaires fears outliving his assets. Reconcile these risks in the IPS with a game plan based on the probabilities of a very long life and the potential need for liquidity to provide long-term care.

  6. Personal Touches: Prohibited Securities and Social Concerns

    One great benefit of the managed account is its ability to exclude securities your client wishes to avoid. The long-term Exxon employee has enough stock to last a lifetime and doesn't need more exposure to oil. An environmentally-conscious foundation would also eschew the industry — but for different reasons. Both investors find relief in the IPS, where specific industries and securities can be noted in the instructions provided to investment managers.

  7. Review the Blueprint

    Before a house is built, a smart contractor will review the house's plans in depth with his clients. “Moving walls after construction makes no sense, and people ask me to do it every year,” a builder friend told me long ago. The investment industry has its own skittish clientele, but their success depends on your ability to help them stay the course, and the IPS is the guide. Review it on a regular basis to reinforce the value of process and discipline. The rewards will speak for themselves over time.

Writer's BIO: Steve Gresham is executive vice president, chief sales and marketing officer for the private client group of Phoenix Investment Partners, Ltd. He is the author of The Managed Account Handbook: How to Build Your Financial Advisory Practice Using Separately Managed Accounts and Attract and Retain the Affluent Investor: Winning Tactics for Today's Financial Advisor. Contact him at [email protected]

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