Investment Policy Statement (IPS)
What Is an Investment Policy Statement (IPS)?
An investment policy statement (IPS) is a document drafted between a portfolio manager and a client that diagrams basic principles for the manager. This statement gives the overall investment objectives and objectives of a client and portrays the strategies that the manager ought to utilize to meet these objectives. Specific data on issues, for example, asset allocation, risk tolerance, and liquidity requirements are remembered for an investment policy statement.
It's standard practice for portfolio managers to have an IPS in place for their institutional clients, for example, retirement plan sponsors and mutual funds. Numerous financial advisors will likewise draft one for their individual clients too.
Grasping the Investment Policy Statement (IPS)
Investment policy statements are habitually, however not generally, utilized by investment advisors and financial advisors to document an investment plan with a client. It gives guidance to informed direction and fills in as both a roadmap to fruitful investing and a rampart against possible missteps or offenses.
An IPS records the investor's investment objectives, along with his time horizon. For instance, an individual might have an IPS expressing that when they are 60 years old, they need to have the option to retire, and their portfolio will every year return $65,000 in the present dollars given a certain rate of inflation.
An effectively thought out IPS depicts asset allocation targets too. For example, it indicates the target allocation among stocks and bonds, further breaking down the target allocation into sub-asset classes, like global securities by region. The targets ought to then have a base and maximum deviation that, when surpassed, will trigger portfolio rebalancing.
An IPS ought to concentrate entirely on depicting the investor's risk/return profile. That incorporates naming asset classes that ought to be stayed away from — as well as those that are preferred.
Special Considerations
As well as determining the investor's objectives, needs, and investment inclinations, an effectively thought out IPS lays out a systematic survey process that empowers the investor to remain fixed on the long-term objectives, even assuming the market gyrates stunningly in the short term. It ought to contain all current account data, current allocation, how much has been accumulated, and how much is currently being invested in different accounts.
The IPS ought to incorporate monitoring and control procedures to be trailed by everyone associated with the investment cycle. This incorporates laying out the frequency of monitoring, indicating benchmarks for comparison of portfolio returns, and substantial procedures for rolling out any future improvements to the IPS. Serious investors think through the potential purposes behind changing their IPS, for example, financial or lifestyle changes. More important, they determine the motivations not to change their IPS (i.e., short-term market performance).
At last, a complete IPS containing actionable provisions that are planned to be followed can assist advisors with preventing clients who need to definitely (and possibly hurtfully) change heading with their portfolios when markets begin to vacillate.
Illustration of an Investment Policy Statement
Napa Valley Wealth Management, an investment advisory firm situated in Walnut Creek and Saint Helena, Calif., prepares investment policy statements for individual clients that could run around twelve pages. "Your IPS guarantees we're both in total agreement, and it fills in as a roadmap for continuous investment choices about your portfolio," the document's presentation peruses.
A Napa Valley IPS then, at that point, sums up the client's investment policy in a table:
| STATEMENT OF YOUR FINANCIAL OBJECTIVES | ||
|---|---|---|
| Â | Â | Â SEE PAGE |
| PORTFOLIO DESCRIPTION | Together, we selected Sample Portfolio B/Balanced Income as the most appropriate investment portfolio for you now. | 6 |
| PORTFOLIO RATE OF RETURN | This portfolio recommendation is designed to generate an average, expected rate of return of 2.5-3.5% above inflation, net of fees and costs. Based on current projections, this equates to a current nominal return of 5.5-6.5%. | 6Â |
| YOUR CASH REQUIREMENTS | Currently you are not taking a monthly distribution. | 2Â |
| INVESTMENT PERIOD | Your investment period is over 10+ years | 2 |
| YOUR RISK TOLERANCE | Your risk tolerance is a maximum, aggregate loss of 5% over a one-year time frame. | 3 |
| PORTFOLIO TAX STRATEGIES | Your portfolio is to be managed as a taxable & tax deferred account, and your combined federal and state tax bracket is to be the marginal tax bracket of 32%. | Â 3 |
| Â | Â | Â |
An investment policy statement basically acts as a business plan for your portfolio. Fostering a strong IPS is definitely not a run of the mill exercise for most investors. It requires a great deal of thought. It likewise requires a comprehension of how the market fills in as well as experience with investment principles and practices.
Features
- An investment policy statement (IPS) is a proper document drafted between a portfolio manager or financial advisor and a client that layouts overall guidelines for the manager.
- Specific data on issues like asset allocation, risk tolerance, and liquidity requirements are remembered for an investment policy statement.
- This statement gives the overall investment objectives and objectives of a client and portrays the strategies that the manager ought to utilize to meet these objectives.
- A thoroughly thought out IPS empowers both the manager and the investor to keep fixed on the long-term objectives.
