Case 1: Mary Middendorf

Mary Middendorf, 43, is marketing director for MCTECH, a multinational supplier of computer and telecommunications equipment. Due to the recent acquisition of her firm by a larger organization, Middendorf has been informed that her position will be terminated in six months. Middendorf is visiting with Michelle Mightman, CFA, to discuss her financial situation. During the meeting, Middendorf makes the following statements:

1. My investment portfolio is currently valued at $700,000. MCTECH has had a fantastic profit sharing and incentive program, so my current holding of MCTECH stock is $500,000 of that. The rest of my portfolio is in a broad market stock index fund. I have a money market checking account, in which I maintain a relatively constant balance of $10,000, and a 401(k) plan worth approximately $300,000. My house, which I received debt-free as part of my divorce settlement, is valued at $350,000. My total after-tax monthly income just meets our living expenses.

2. I am not married, but I have two children, ages 14 and 16, and I receive $1,000 a month in child support. That will end as each child reaches 18, and my ex-husband is not required to help with college expenses. The 16-year-old currently has no desire to go to college, as he is a rock musician and wants to follow his heart. Of course, that might not work out for him. The 14-year-old wants to go to a prestigious university and become a surgeon. I want to be able to pay most of her college expenses, so that she doesnt graduate with student loans. Assuming she gets into her college of choice, her undergraduate education could cost $50,000 a year.

3. When my position is terminated with MCTECH in six months, I will receive a lump-sum after-tax cash payment of $200,000, which is twice my current salary. The acquisition is all stock so my MCTECH position will be replaced by the stock of the acquiring firm.

4. The all stock transaction means that my portfolio will contain a much more stable security. The previous two years were substantially rocky for my investments, so I am happy the MCTECH stock will be replaced. My investment portfolio exhibited a substantial improvement with the news of the acquisition, and I look forward to the continued appreciation of my portfolio with the favorable performance of the acquiring companys stock. I want to avoid overly risky individual investments and would like my portfolio to be relatively stable and not experience any significant losses. I do not expect any unusual expenses in the short-run, but I want to maintain a comfortable cushion of emergency funds.

5. Although various firms have given me employment offers commencing in six months, I would like to travel and generally rest during the six months following my separation from MCTECH. Most employment offers I received are for amounts slightly higher than what I am currently making at MCTECH. I am confident I will be able to get other equivalent offers in a years time.

Instructions:

To properly assist clients, a financial advisor must know the clients current situation and plans for the future. To accomplish this, the advisor must meet with the client to develop an Investment Policy Statement, IPS. The Objectives and Constraints portion of the IPS (as defined by CFA Institute) is extremely important. On the following pages, you will see questions related to Investment Policy Statements in general as well as tables containing the objectives and constraints section of an IPS.

Part 1: Answer the following questions from the perspective of a financial advisor.

1. What is an Investment Policy Statement, IPS, and what should it contain? Why is it important to develop an IPS before determining the appropriate asset mix for your client?

2. How often should you meet with or contact your client to determine whether the clients situation has changed and whether the clients IPS should be updated? What sorts of things would require an update to a clients IPS?

3. After reading an article, your client is very excited about a new stock and wants you to add it to her portfolio. Considering your clients objectives and constraints, what must you do before adding the stock to her portfolio?

Part 2: Objectives and Constraints

Table 1: Objectives and Constraints for the Typical Investor.

Define the components listed and explain what must be considered when determining each for the typical individual investor. (Be sure to consider the clients current situation and long-term plans.) You may use any website as resource, but be sure to include the site address in your reference list on the last page.

Objectives and Constraints for the Typical Individual Investor
Objectives	Risk Tolerance
	Return Objective
Constraints	Time Horizon
	Liquidity Needs
	Legal and/or Regulatory Considerations
	Tax Considerations
	Unique Concerns

Table 2: Objectives and Constraints for Mary Middendorf.

Explain each component as it relates to the client, Mary Middendorf. Be very specific, using the numbers given in the case. (Be sure to consider Marys current situation and her long-term plans, whether specifically stated or implied.)

Investment Policy Statement for Mary Middendorf: Objectives and Constraints
Objectives	Risk Tolerance
	Return Objective
Constraints	Time Horizon
	Liquidity Needs
	Legal and/or Regulatory Considerations
	Tax Considerations
	Unique Concerns