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Introduction

Investment Policy Statement is a document that is drafted between an individual investor and financial advisor. Creating an investment policy statement is a great practice. Also, it is a keystone for the holistic wealth management process. This tool is used by many institutional fund managers and individual financial advisors. Furthermore, it also helps to plan, build and preserve investor’s wealth. 

In this article, we will provide you with a guide on investment policy statements along with its features and elements. 

Understanding the Investment Policy Statement

An investment policy statement (IPS) is a document which is signed between an individual investor and financial advisor or portfolio manager. This document gives a general outline on understanding how to manage investor’s money. Usually, the IPS describes the client’s overall investment objectives and long term goal. Also, this statement specifies the strategies that the fund manager will implement to achieve the desired results. 

The investment policy statement contains the client’s data such as asset allocation of the portfolio, liquidity requirements and risk profiling. Therefore, investors must provide information related to what they are looking for and how much risk they are willing to take. Thus, this helps the folio manager to make decisions which will, in turn, benefit the investor in the long term financial investment.

Often, investment policy statements are used by financial advisors or investment advisors. They compile an investment plan for a client which serves as a road map for informed decision making. Moreover, it is a guide for successful investing. Hence, it prevents financial advisors and investors from potential trading mistakes. 

An investment policy statement is not only a good idea for large investors but also helpful for small individual investors. Furthermore, drafting a detailed IPS helps the investors to keep calm in case of market volatility and emotional biases. Generally, a new investor is more emotionally attached to their investments. Through IPS, it may help the investor avoid emotional bias and stick to the original investment plan. 

Features of the Investment Policy Statement

The following are the key features for the investment policy statement.

Investment Goal

Under this, the investors outline their purpose of an investment policy statement. Also, they state the financial goals they wish to achieve. Furthermore, they also mention their time horizon for investment, the returns they expect as per their goals. The objectives can be as detailed as per the investors wish. 

Return and Risk

This data includes the risk tolerance levels of investors. It specifies how the investors feel about trading and its costs. This is an integral part of the investment statement policy. It provides a guide to the portfolio manager while choosing particular asset classes to invest. Also, the return and risk go hand-in-hand while making investment decisions. 

Asset Selection

Usually, the investors mention the type of asset which seems closer to their investment goal. This where the investors say which variety of asset classes they wish to invest. For instance, individual stocks, commodities, bonds, real estate, ETFs or mutual funds. What are different factors associated with while choosing an asset to in?

Asset Allocation

For any investment portfolio, an essential factor is tactical asset allocation. Moreover, 90% of the performance of the portfolio depends on asset allocation. Hence, a diversified portfolio will reduce the volatility of the investment portfolio. Subsequently, one asset’s positive performance offsets a negative performance of another asset. Thus, this brings a chance of success for the portfolio.

Review

This is also an equally important feature of IPS. One need not check their investment portfolio every single day. However, one should control and check the performance of the portfolio, either monthly, quarterly, half-yearly or even on an annual basis. This helps the investors to rebalance their portfolio at the same time based on current market conditions. 

An investment policy statement can be more detailed. The main goal is to stick to it for the desired results and not just compile it. 

Elements of the Investment Policy Statement

The following are the elements (components) of the investment policy statement.

Scope and Purpose of IPS

  • Identifying the investor
  • Setting the roles and responsibilities of the financial advisor.
  • Identifying the risk management process
  • Creating and identifying the investor’s source of wealth
  • Finally, allotting the responsibility for portfolio monitoring and reporting.

Governance

  • Specifying the responsibilities in determining, executing and monitoring the implementation of the financial plan
  • Describing the process related to reviewing and updating the investment policy
  • Describing the authority for changing the vendors associated with the policy
  • Giving the responsibility for determining the tactical asset allocation of the portfolio, including the inputs used and the criteria for the development of input assumptions
  • Giving the responsibility for risk management, monitoring and reporting

Investment objectives, Risk and Returns

  • Describing the overall investment objective of the client
  • Stating the assumptions regarding risk and returns and spending distribution of investor
  • Defining the investor’s risk tolerance level
  • Mentioning related constraints like liquidity requirements, tax considerations, restrictions on specific investments or any other legal constraints
  • Mentioning any other constraints or provide information relevant to the investment strategy

Management of Risk

  • Establishing performance measurement metrics and reporting the same
  • Indicating the metrics used to measure and evaluate the risk
  • Describing the process for portfolio rebalancing. Also, targeting asset allocations.

To conclude, if the investors want to stay on course to meet their long-term financial goals, it’s essential to prepare an investment policy statement. This helps in maintaining the portfolio in line with the investment objectives within a specific time horizon. With continuous monitoring, it also helps to rebalance the portfolio based on market conditions. 

The financial advisor can be a registered investment advisory firm (RIA) or a financial planner or an investment manager. They need to plan assets of an investor with care, skill, prudence and diligence. Thus, IPS provides a clear road map for a guide towards regular investment decisions as investors move forward. 

Frequently Asked Questions

What is an investment philosophy statement?

The investment philosophy statement is a description of one’s principles and beliefs. It helps to govern the investment approach and guide for all investment decisions. Therefore, it is the core section of an investment policy statement (IPS). Also, it includes information such as how diversified the plan is, what types of funds are there and what is the target allocation.