In any relationship between a professional and client, the client can choose who to hire and on what terms. If the professional does not agree, then the client can go elsewhere. In the case of the ICPM, however, once the professional and the client come to an agreement, the professional is in charge of what happens day-to-day.
There is a major difference between a full-service financial advisor and an ICPM. The advisor must approach the client for instructions with respect to all transactions. The ICPM need only report periodically, as instructions have been given in the form of the initial contract.
The actual role of the ICPM
The client is therefore responsible for what the ICPM does only in the sense that the client chose the mandate (relying on advice from the ICPM). So long as the ICPM follows the mandate, there is little to discuss with the client as decisions are made. The ICPM must report to the client. The client should monitor what the ICPM is doing, either through written reports or through personal communication. If the client is unhappy with progress, or if the ICPM identifies changes to the market that have an impact on the mandated strategy, then the parties must meet to discuss the changes. This is especially true for significant events that change the landscape for the client. In another article, the subject of “material change” will be discussed.
Each client is different
Because clients do not have the skills that professionals have, clients retain the professionals to perform those functions. Often clients do not understand what is involved with the investment process.
In all these circumstances, the ICPM must cater to the ability of the client to understand the issues involved with any decision. A client with weaker skills must receive more education. The ICPM should not assume that the client fully understands the concepts of risk and time horizon. More importantly, the ICPM should not assume that the client understands the risks of a particular strategy as they affect that client.
An uninformed client is not responsible for losses arising from a risky strategy. “Informed consent” applies to investment relationships as much as to doctor-patient. Only an informed client can be truly said to be “in charge”.
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