Case 2: Ernie Marks:

Ernie Marks, 62, is the owner of a regional construction company. He started the company at age 25 after receiving a pickup truck from his grandfather. Through conservative management and judicious use of debt, Marks was able to build the company to over 150 employees. His company is debt-free and generates all necessary operating funds internally.

Marks wife, Ellie, does not work and they have two children. Their daughter, Allison, 28, suffers from a seriously debilitating disease and requires more or less constant attention. She, unfortunately, is not expected to live more than another 5 to 10years. Their son, Ernie, Jr., is 26, and in good health. Ernie, Jr. finished in the top 5% of his graduating class at a prestigious university in the Northeast, but he has done nothing with his degree.

Ernie, Sr. wants to retire at 65, and had wanted Ernie, Jr. to succeed him at the helm of his company.Efforts over the years to encourage and train Ernie, Jr. proved unsuccessful, however. As a result, Marks just sold the firm to a national construction firm for cash. His investment portfolio, including the proceeds from the sale, totals $5 million. As part of the sale, he has agreed to stay with the firm until he retires at 65.

Ernie, Sr.has made these statements to Chris Webber, CFA, who is his financial advisor:

1. Ellie and I owe nothing on our home. We live conservatively and we do not plan to move. The acquiring firm has agreed to pay me $150,000 per year, increasing at the general rate of inflation, until I retire in 3 years.

2. We want to avoid overly-risky individual investments and would like our portfolio to be relatively stable and not experience any significant losses. We do not expect any unusual expenses in the short-run, but we want to maintain a comfortable cushion of emergency funds.

3. Our living expenses will be about $100,000 in the coming year, so my income will cover them. Of course, our expenses will more than likely increase at the general rate of inflation.

4. Ellie has been caring for Allison, but we have decided we need to seek professional care. That will start next year and will total about $100,000 a year. Associated costs will increase at a rate of inflation equivalent to the rate of inflation for the health care industry, which has historically been higher than the general rate of inflation.

5. Ernie, Jr.s free spirit has essentially made him unemployable. I would like to provide him a lifetime annual stipend of $50,000 starting next year and adjusted for inflation each year after that. Should Ellie and both die, the stipend will stop and I would like Ernie, Jr. to receive half of the estate. The remainder will go to charities, including the National Cystic Fibrosis Foundation.

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 stockand wants you to add it to her portfolio. Consideringyour clients objectives and constraints, what must you do before adding the stock toher 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 Ernie, Sr.and Ellie Marks.

Explain each component as it relates to the clients, Ernie, Sr.and Ellie Marks. Be very specific, using the numbers given in the case. (Be sure to consider the Marks current situation and their long-term plans, whether specifically stated or implied.)

Investment Policy Statement for Ernie, Sr.and Ellie Marks: Objectives and Constraints
Objectives	Risk Tolerance
	Return Objective
Constraints	Time Horizon
	Liquidity Needs
	Legal and/or Regulatory Considerations
	Tax Considerations
	Unique Concerns