The difference between an Investment Policy Statement and a Know - Your - Client Form

All this jabbering about the importance of having an Investment Policy Statement, and I forgot to mention an important dynamic already in place in the industry. An IPS is not to be confused with a Know Your Client form, which are designed to protect and limit liability of the brokerages. While the IPS is an extensive document outlining the vital dynamics of the client-broker relationship, the know-your-client form represents the industry's minimum standard of what is expected for an advisor to know about their client. For example, the Mutual Fund Dealers Association requires the following:

- Investment Knowledge: extensive, moderate, none
- Risk tolerance: low, medium, high
- Time Horizon: 1 to 3, 4 to 5, 6 to 9, 10 plus
- Investment Objective: income, growth (short/long term), balanced
- Individual income
- Household net worth

Note how general a profile this is. If you are ever a victim of advisor malfeasance, it is the first thing that is looked at by the Branch Manager or perhaps the Compliance Department. Furthermore, John Lawrence Reynolds wrote in his book, The Naked Investor, that financial advisors will have their clients sign the bottom and fill the rest in later. Be wary of this because, if there is problem, it will be the place you'll have to turn to in order to make your case.