Investment Policy Statement
What Does Investment Policy Statement “IPS” Mean?
An Investment Policy Statement is a document drafted between Adviser and a client that outlines the relationship between the client and Adviser.
This statement provides a comprehensive documentation of the relationship between client, the Adviser, and the investment portfolio.
The client’s personal circumstances and lifestyle, both current and intended, is documented. The statement clearly defines general investment objectives and constraints for the investment portfolio and describes the strategies that the Adviser should employ to meet these objectives. Specific information on matters such as asset allocation, risk tolerance, and liquidity requirements would also be included in an Investment Policy Statement. Client and Adviser expectations, such as return expectation and contact frequency, should also be documented to facilitate good relationship.
Why Is Investment Policy Statement Important?
The Investment Policy Statement is the linkage between the client, the Adviser, and the investment portfolio.
The Investment Policy Statement is the foundation of managing your investments, and serves as a structured decision-making process for clients and Adviser to make investment decisions following a well-conceived, long-term investment discipline. This helps to balance return seeking and risk taking; increasing the probability of success in achieving investment goals.
The absence of an Investment Policy Statement reduces decision making to an individual event basis, and often leads to chasing short-term, single security opportunities. The presence of IPS guides all parties to maintain their focus on the objective of the investment, preventing panic during turbulent times, or over-confidence in exuberant times.
The Investment Policy Statement provides an effective channel of communication between client and Adviser. This will help clarify issues of importance and concerns to both parties. Conflicts of interest and general misunderstandings are minimized since the IPS is in writing and both the client and Adviser have agreed to adhere to it.
What is in the Investment Policy Statement?
Clients are responsible for the content of their own Investment Policy Statement. Once established, it is then the Adviser’s duty to adhere to the IPS. IPS normally doesn’t change in response to market fluctuations, and should be long-term to prevent arbitrary or impulsive revisions. Once the IPS is established, updates will be done when there are material changes in your personal or financial circumstances.
Content documented includes the objectives of the investment, client’s personal circumstances and constraints (time horizons, income/liquidity needs, tax considerations, legal and regulatory requirements, and unique preferences). Client and Adviser will iron out the appropriate investment strategies (asset allocation/selection, monitoring and evaluating performance) and investment expectations (expected returns, return volatility).
This Investment Policy Statement is not a contract of any kind. It ensures the success of your investment just like a structured job scope ensures an employee is productive and focused in a company.