What is an Investment Policy Statement? Do you have one?


I believe every Investor should have an Investment Policy Statement or IPS.

An IPS outlines the ground rules of the relationship between you and your investment or financial advisor. It denotes your goals and objectives, your appetite for risk and your desire for return on the money you provide the advisor to invest. In turn those criteria determine the assets that are appropriate for your portfolio. It also provides a backdrop for review of the portfolios performance as compared to your intent as noted in the IPS. Are you achieving your goals?

What can happen if you do not have an IPS?

Your advisor can invest in any security without considering your needs and desires. Often I hear the following: not a problem she/he knows me and what I consider appropriate. I find that statement to be ill considered. If she/he knows you that well they should be able to put it in writing. That way there are no misunderstandings.

So what is included in an IPS? I encourage my clients to begin with a written financial plan. That plan includes the purpose of the money, the retirement goals and objectives and a timeline for achievement. After the plan is completed we move to creating an IPS which achieves the retirement goals.

Let’s take a look at some of the areas that need to be considered

Investment philosophy: long term, short term, return on investment or return of investment. What bench marks are going to be used to judge performance?

Risk Tolerance: how much fluctuation in the investment markets can you comfortable tolerate and still sleep at night? The upside is easy, but can you stand to see your portfolio decline 10, 15, 30%?

Asset Allocation: how are you investments to be allocated amongst the asset classes available? i.e. stocks, bonds, U.S, foreign, Reits, ETFs? There are at least 25 asset classes depending on how they are defined.

Selection Criteria: what is the selection criteria methodology? Is it based on management expenses, returns from the past, projections, estimated future returns?

Review Process: how often will you meet and discuss the portfolio, its performance and its comparison to the original Investment Policy Statement? How did the portfolio perform compared to the benchmarks?

Rebalancing: is rebalancing a function of time or is it reviewed and rebalanced when asset classes exceed a percentage of the original allocation percentage? And what are those percentages?

These are the major areas that need to be considered. Alas, I do not have space to be more specific.

If you do not have an IPS in writing I urge you to speak with your advisor and ask them to create one for you. That way all the participants will have an understanding of objectives and expected outcomes.

If you would like to know more about Investment Policy Statements or if you need assistance please feel free to call me.