Watters Financial Services, LLC - Investment Policy Statement
The purpose of an Investment Policy Statement (IPS) is to establish a clear understanding of the investment objectives and guidelines. It is to assist in effectively supervising, monitoring and evaluating the investment of the client’s portfolio. The Investment Policy Statement is intended to accomplish the following:
- Encourage constructive and ongoing communication.
- Establish criteria for matching long-term objectives with an appropriate investment portfolio.
- Establish an investment plan to generate maximum returns with a prudent level of risk over the time horizon.
- Provide a frame of reference which will help the client stay focused and not react to short-term factors especially during times of heightened market volatility.
- Outline a structure designed to obtain a certain level of diversification by including various asset classes among other criteria.
- Clearly identify which assets are restricted positions.
As a fiduciary, I will have the following duties and responsibilities to assist the client in the research, selection and management of the investments.
1. Provide you with full disclosure and transparency.
Disclosure documents include an Investment Management Agreement, Form ADV Part 2A (updated and offered annually and available on the website), Investment Policy Statement (IPS), ADV Part 2B (available on the website-bottom of the home page) and the Privacy Notice.
2. Conduct a Discovery meeting with you.
Information will be gathered during the discovery meeting. Financial documents, investment statements, risk questionnaire and application will be reviewed. The client’s needs, goals and objectives will also be discussed.
3. Determine the Time Horizon
The minimum investment period should be at least 5 years for any portfolio containing equity securities. For shorter periods of time, portfolios should be comprised predominantly of fixed investments since the markets are volatile. A period in excess of 10 years is usually considered a full market cycle. This increases the likelihood that the client will have an opportunity to recover investment losses during market fluctuations. Interim fluctuations should be viewed with appropriate perspective.
4. Determine the Risk Tolerance
A certain level of risk must be assumed in order to achieve long-term investment objectives. Economic and market conditions among other factors cause interim fluctuations in market value and rates of return. Factors such as the client’s prospects for the future, current financial considerations and the ability to withstand short and intermediate term variability is considered among other criteria. Results from the risk questionnaire, investment philosophy and past experiences with money are taken into consideration when establishing the risk tolerance.
5. Determine the Liquidity Requirements
Liquidity refers to the availability and ease at which the assets can be sold at a fair market price. The primary reason for maintaining liquidity in the portfolio is to ensure that cash can be raised rapidly to take advantage of new investment opportunities, changes in asset allocation and asset class selection as well as purchasing a home, paying for college, etc. The client may request withdrawals at any time by notifying either WFS or TD Ameritrade directly.
6. Determine the Risk/Return Profile
Expected return correlates strongly with risk. The goal is not simply to maximize the return of the portfolio or to avoid risk altogether. Rather, the goal is to maximize the portfolio return while simultaneously minimizing the portfolio risk. It is important that future income needs, and expected returns are reasonable, realistic, and adjusted for inflation.
7. Determine the Asset Allocation
Research material will be used to analyze and evaluate the historic and expected relationships between the asset classes, current securities market and economic environment. Most of the research materials used are not available to the public.
The foundation of WFS’s investment philosophy is based on the fundamental belief of diversification and a disciplined long-term approach to managing investments. Research indicates that the decision as to how the assets are allocated among various asset classes will account for much of the variation in the portfolio’s performance. Diversification expands the portfolio opportunity set and is designed to reduce risk. Much of the emphasis in developing the Investment Guidelines (IG) is determining the asset mix and asset allocation. WFS will develop the target allocation for each asset class and monitor and recommend changes as necessary.
History shows interest-generating investments, such as bond portfolios, have the advantage of relative stability of principal value. However, they provide less opportunity for reaching long-term capital growth due to their susceptibility to inflation. Equity investments, such as common stocks, clearly have a significantly higher expected return but have the disadvantage of much greater year-by-year variability of return and increased risk. From an investment decision-making point of view, this year-by-year variability may be worth accepting, provided the time horizon for the equity portion of the portfolio is sufficiently long.
Outside employer retirement assets (401K, 403b and 457 plans) will be reviewed and recommendations will be offered on asset allocation. It is the client’s responsibility to implement any recommendations.
8. Select the Asset Classes
Long-term investment performance, in large part, is a function of the asset class mix. Enough asset classes with different and distinct risk/return profiles is very important. The diversification of asset classes will be based on the research and analysis conducted on the client’s behalf. The broad asset classes’ long-term performance characteristics, performance expectations, and the client’s risk/return profile will also be considered.
Generally, WFS uses the following core asset classes (ranked in ascending order of risk, least to most).
- Money Market
- U. S. Fixed Income
- Large Cap Value U.S. Equities
- Large Cap Blend U.S. Equities
- Large Cap Growth U.S. Equities
- Mid Cap Blend U.S. Equities
- Real Estate Funds
- Commodity Funds
- International Equity
In seeking to further diversify the portfolio in pursuit of the risk/return objectives, WFS may utilize additional asset classes which may include, but are not restricted to Emerging Markets Equities or Intermediate Bonds. WFS generally will not recommend Real Estate Investment Trusts, Hedge Funds, Absolute Return or Market Inverse Vehicles.
9. Select the particular investment vehicles or products within the asset class
Some of the criteria are, but not limited to, the following:
- Historic volatility/consistency of performance relative to the assumed risk
- Investment performance compared to the appropriate index or peer group
- Performance rankings and likelihood of future investment success
- Investment style, philosophy and stability of the proposed fund
- Investment objectives of the fund which determines the kind and combination of investments held by the fund
- How well each proposed investment complements other assets in the portfolio
- Fees, load or no load, net asset value, sales charge.
10. Implement the strategic investment plan
The investment strategy will be customized to the client. All required documents will be sent to the custodian, TD Ameritrade. All transaction orders such as buy/sell will be placed. Confirmation of trades and fees are monitored on an ongoing basis. Note: Orders will NOT be accepted if they are communicated by email or by message left on voicemail.
11. Determine the time and necessity of rebalancing the portfolio
Overtime, market conditions and the varying performance of the asset classes may cause the portfolio’s asset mix to vary from the original target allocation. To remain consistent with the asset allocation guidelines established, each asset class will be reviewed on a periodic basis. As necessary, rebalancing will be recommended either to maintain (approximately) the initial target allocation or to make an adjustment to the target allocation when appropriate. Outflows will be deployed in a manner consistent with the strategic asset allocation. The client will be informed if the cash flows are insufficient to bring the portfolio within the strategic allocation range. At that time, the client will decide whether to order transactions that will bring the strategic allocation within the threshold range.
The ability to rebalance quickly when market conditions change may be affected by the client’s decision to give WFS non-discretionary authority. Discretionary authority allows WFS to act more quickly to market changes and manager changes.
12. Consider the tax efficiency of the portfolio
Following are some considerations when selecting investments that will maximize the after-tax returns and improve the tax efficiency of the portfolio:
- Opportunities to harvest capital losses by selling funds that have unrealized losses when the markets are volatile.
- Advantages and disadvantages of holding the investment until it qualifies for long-term capital gains treatment before selling.
- Avoid selling investments that have large built in gains unless the sale is justified by the incremental expected return from the alternative investment.
- Tax efficiency of each investment with a focus on the potential after-tax return relative to competing investment options.
13. Monitor the duties and responsibilities of the custodian
WFS have selected TD Ameritrade for “best execution” meaning WFS has determined that TD Ameritrade will successfully provide the following services to the client.
- Secure the portfolio assets and maintain separate accounts by legal registration
- Settle all transactions, buy-sell orders.
- Provide monthly statements that detail transactions, cash flows, securities held, and current value, change in value of each security and the overall portfolio since the previous report.
- Collect all income and dividends owed.
- Competitive fees
14. Monitor the duties and responsibilities of the Investment Managers
Investment managers will be put on a “watch-list” based on a downgrade of their rating to 2 stars based by Morningstar Fund Research. The decision to replace a fund will depend on the individual circumstances. All the following will be reviewed to decide if a fund should be replaced:
- Performance relative to peer group
- Performance relative to assumed risk
- Inception date of product
- Correlation to peer group
- Assets under management
- Holdings consistent with style
- Expense ratios and fees
- Stability of organization
15. Monitor and maintain a sustainable and disciplined investment strategic plan.
Conduct ongoing review and monitoring the account through ongoing research, periodic in-person meetings or webinars and telephone conversations. As time passes or personal events occur the current strategic plan may become unsuitable. It is imperative that the client keeps WFS informed of any significant changes that may affect the client’s financial situation or goals. Changes to the time horizon or risk tolerance for example, could greatly affect the recommendations WFS make concerning asset allocation and asset mix.
WFS’s Advisors are Certified Financial Planners ™ (CFP®) and have taken the oath to act as a Fiduciary for their clients. Being a Fiduciary means that the advisor has a duty to act in the best interest of the client, always when providing financial advice to a client.
WFS is a Registered Investment Advisory (RIA) firm and as such is legally required to act as a Fiduciary to their clients and provide full disclosure which is provided in the ADV brochure. The brochure is given to the client at the start of the engagement, offered annually thereafter and is also available on the website.
WFS is an independent firm and is not affiliated with any investment firm, bank or insurance company.
The firm’s method of compensation is “fee-only” meaning we do not receive sales-related compensation. We do not sell investment products or insurance policies. Fees received come directly from the clients.