Investment Policy Statement (IPS)

B is correct. Robert's early retirement represents a material change in circumstances that requires immediate IPS revision. His time horizon has shortened from 13 years to present, his objectives have shifted from accumulation to income, and his liquidity needs have increased dramatically. The IPS must be updated before making any investment changes to ensure they align with his new situation and document the adviser's fiduciary duty.

A violates the adviser's duty of care because the 5-year-old IPS was designed for a completely different situation (working professional with 13-year horizon vs. immediate retiree needing income). Continuing with the old IPS would fail to serve Robert's current best interest. C is inappropriate because material changes require immediate action, not waiting months for a scheduled review. when client circumstances change significantly, the IPS update cannot wait. D fails to address the fundamental problem: the strategic allocation itself (70% stocks) is likely unsuitable for an immediate retiree needing income. Rebalancing more frequently to an inappropriate target allocation does not satisfy fiduciary obligations.

D is correct. All four components are core elements of a comprehensive IPS. (1) Investment objectives and time horizon establish what the client wants to achieve and when; (2) Risk tolerance and constraints define how much volatility the client can accept and any limitations (liquidity needs, tax concerns, ethical restrictions); (3) Strategic asset allocation targets specify the long-term mix of investments to achieve objectives within risk tolerance; (4) Rebalancing thresholds and procedures define when and how to adjust the portfolio back to strategic targets when allocations drift.

A, B, and C are incomplete. A comprehensive IPS requires all four components to serve as an effective roadmap for portfolio management. Without objectives, you have no destination. Without risk tolerance and constraints, you cannot determine appropriate investments. Without strategic allocation, you have no plan. Without rebalancing procedures, you have no mechanism to maintain the plan.

C is correct (does NOT require immediate IPS revision). A 2% drift in allocation (60/40 to 62/38) is normal market movement and does not represent a change in client circumstances. This drift should be addressed according to the IPS's existing rebalancing procedures, which typically trigger action at 5-10% drift. The IPS itself does not need revision; it should be followed as written.

A requires immediate IPS revision because tripling investable assets materially changes the client's financial situation, potentially allowing for different investment strategies, risk levels, or objectives (e.g., could now focus on wealth transfer, different asset classes previously unavailable). B requires immediate revision because losing half the portfolio dramatically changes the client's financial resources, likely requiring revised objectives, more conservative allocation, or different income planning. D requires immediate revision because job loss with new income needs fundamentally changes time horizon, liquidity requirements, and risk tolerance. a working professional's IPS does not accommodate drawing portfolio income during working years.

B is correct (the EXCEPT answer). An IPS is NOT the same as Form ADV Part 2. Form ADV Part 2 is a regulatory disclosure document (firm brochure) that describes the advisory firm's business, services, fees, conflicts of interest, and disciplinary history. It applies to the FIRM's operations. An IPS is a CLIENT-SPECIFIC document that outlines the investment plan for an individual client's portfolio. They serve completely different purposes.

A is accurate: The IPS specifies strategic asset allocation targets (e.g., 60% stocks/40% bonds) that represent the long-term plan for achieving client objectives within risk tolerance. B is accurate: IPS should be reviewed at least annually and updated whenever client circumstances change materially (retirement, inheritance, marriage, divorce, job change, risk tolerance shift). D is accurate: A well-documented IPS demonstrates the adviser has thoroughly assessed the client's situation, created a tailored plan, and is making investment decisions consistent with that plan. all evidence of meeting fiduciary duty of care and loyalty.

B is correct. Statements 1, 3, and 4 are accurate.

Statement 1 is TRUE: A comprehensive IPS should include specific rebalancing triggers that define when the portfolio will be adjusted back to strategic targets. Common triggers include percentage drift from target allocation (e.g., rebalance when any asset class varies by more than 5% from target), time-based rebalancing (e.g., quarterly or annually), or threshold-based rebalancing. This provides clear guidance for ongoing portfolio management.

Statement 2 is FALSE: The IPS is NOT a regulatory filing and does not require approval from SEC or state regulators. It is an internal document between the adviser and client that guides portfolio management. While advisers must maintain records of IPS documents for compliance purposes, there is no requirement to submit them to regulators for approval before implementation.

Statement 3 is TRUE: Investment constraints are a critical IPS component. Constraints include liquidity needs (emergency fund, planned large purchases), time horizon (retirement date, education funding timeline), tax considerations (tax-loss harvesting strategies, preference for tax-advantaged investments), legal/regulatory restrictions, and unique circumstances (ethical/ESG preferences, concentration in employer stock, required minimum distributions).

Statement 4 is TRUE: While not legally required in all cases, best practice is for both client and adviser to sign the IPS. This documents mutual understanding and agreement on the investment plan, provides evidence that the client was consulted and informed, and creates accountability for both parties to follow the agreed-upon strategy. The signature demonstrates informed consent and helps protect the adviser by showing the client participated in creating the plan.