How do I read an Investment Policy Statement (IPS)?

An investment policy statement (IPS) is a letter that a client and a portfolio manager write to each other. It lays out the manager’s general rules. The statement gives a client’s general investment goals and aims and explains the methods the manager should use to reach these goals. A business policy statement details how to divide up assets, how much risk you are willing to take, and how much cash you need.

Often, portfolio managers have an IPS set up for their big clients, like mutual funds and companies that run retirement plans. Many financial gurus will also write one for each of their clients.

How to Read and Understand the Investment Policy Statement (IPS)

Sometimes, but not always, investment and financial experts write an investment plan with a client as an investment policy statement. Informed decisions can be made with its help, and it protects against mistakes and wrongdoings by showing the way to successful spending.

An IPS lists the investor’s financial goals and how long he will wait to reach them. For example, a person may write in their IPS that they want to be able to retire by the time they are 60 years old and that, at a specific rate of inflation, their stock will earn them $65,000 a year.

A well-thought-out IPS also spells out goals for allocating assets. For example, it says how much of the portfolio should be made up of stocks and bonds, and it breaks that goal allocation down even further into sub-asset classes, like global securities by region. Then, there should be a minimum and maximum deviation from the goals that, if reached, will cause the portfolio to be rebalanced.

An IPS should pay extra attention to explaining the risk/return profile of the investor. That includes listing asset types that you should stay away from and those that you should choose.

Unique Things to Think About

A good IPS spells out the investor’s long-term goals, priorities, and investment preferences and sets up a structured review process that helps the investor stay focused on those goals, even if the market goes wild in the short term. It should have information about all present accounts, how much money has been saved, how much is being invested in different accounts right now, and how much has been allocated.

The IPS should have rules for everyone involved in the investment process to follow regarding tracking and control. This includes deciding how often to check on the IPS, what benchmarks to use to compare portfolio results, and clear steps for making any changes to the IPS in the future. Serious owners think about why they might want to change their IPS, like when their finances or way of life change. Even more importantly, they explain why they don’t want to change their IPS (i.e., short-term market success).

Lastly, an all-encompassing IPS with explicit rules that must be followed can help advisers stop clients who want to make significant (and possibly harmful) portfolio changes when markets start to fall.

An example of a statement of investment policy

Napa Valley Wealth Management is an investment advisory company with Walnut Creek and Saint Helena, California offices. For individual clients, they make investment policy statements that can be up to twelve pages long. The paper’s first sentence says, “Your IPS helps make sure we’re both on the same page, and it serves as a roadmap for ongoing investment decisions about your portfolio.”

Conclusion

• An investment policy statement (IPS) is a written document that a client and a portfolio manager or financial advisor write together. It lays out the manager’s general rules.
• The statement gives a client’s general investment goals and aims and explains the methods the manager should use to reach these goals.
• A business policy statement covers specific topics like how to divide up assets, how much risk you are willing to take, and how much cash you need.
• Both the boss and the investor can stay focused on the long-term goals with an IPS that is well-thought-out.