Case 3: Barney Smythe

Barney Smythe, 40, and his wife Heather, 39, are considering what to do with $2,500,000 (after-tax) Heather is to receive as a result of her mothers death. Barney earns $100,000 per year in his current position. Heather has been and will continue to be a stay-at-home mother. They have two children, Lenny, 12, and Buford, 10. Their annual living expenses are about $150,000.

In addition to the inheritance, they have $1,250,000 in savings and investments. In a discussion with representatives of Worth Enhancers, the Smythes made these statements:

1.One of our goals is to pay our childrens college education.

2. We expect our annual expenses to increase at the general rate of inflation.

3. We both want to retire at 65 and be able to live comfortably but not extravagantly.

4. We are in the 25% marginal tax bracket.

5. We want to avoid overly-riskyindividual investments and would like our portfolio to be relatively stable and not experience any significant losses.

6. We do not expect any unusual expenses in the short-run, but we want to maintain a comfortable cushion of emergency funds.

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 Barney and Heather Smythe.

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

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