Investment policy statement: What it is and why you should have one

“If you don’t know where you’re going, any road will get you there.”

This quote stresses the importance of having a roadmap to guide you toward your destination, regardless of where you’re headed. When it comes to investing, this roadmap is sometimes referred to as an investment policy statement, or IPS.

What is an investment policy statement?

An investment policy statement is a strategic guide to the planning and implementation of an investment program. It does the following:

• Defines the purpose of your wealth
• Lays out your investment objectives and constraints
• Describes parameters and expectations for how your assets will be managed
• Documents a communication plan for performance evaluations

According to Andie Ho, managing director, national investment consulting with Ascent Private Capital Management of U.S. Bank, creating an investment policy statement is especially important for people who have vast wealth and complex financial lives.

“Our clients can’t afford to just wing it when it comes to managing their wealth,” she says. “It’s critical for them to have a detailed plan in place for managing their assets according to very specific criteria.”

Investment policy statement: The starting point for portfolio management

According to Ho, an investment policy statement represents the starting point of the portfolio management process.

“The main goal of an IPS is to set forth guidelines for how portfolios will be constructed, managed and evaluated,” she says. “An IPS helps ensure that both the client and advisor are on the same page throughout the investment journey.”

“Drafting an IPS is a highly collaborative and dynamic process between the investor and advisor that requires a lot of thought and should not be rushed,” Ho continues. “It provides a basis for understanding why certain investment decisions are made and how these decisions fit into the overall financial plan.”

Having an investment policy statement gives clients a sense of control and ownership of the investment management process. “An IPS defines the client’s and advisor’s roles and responsibilities, which helps establish accountability,” Ho adds. “Creating an IPS is also educational. It helps clients better understand the investment process, so they can recognize how certain strategies contribute to the overall financial plan.”

An IPS is highly customized to the unique needs and goals of each client. It’s portable, so it’s easily understood by other professionals in case another advisor is introduced to the relationship, or a second opinion is needed.

Ideally, an IPS provides a foundation that helps clients stay focused on their long-term objectives even in the face of short-term market volatility.

Investment policy statement example

There are three main elements of an investment policy statement.

1. The scope and purpose of the portfolio.

This section includes the scope of the investment policy statement, the client’s background (including the source of wealth), the portfolio’s purpose(s) and the roles and responsibilities of the client and advisor.

2. The investment objectives and constraints.

This section includes the portfolio strategy, investment objectives, portfolio construction (such as target asset allocations and asset classes) and any investment constraints, such as the time horizon and liquidity requirements.

3. Performance measurement and evaluation guidelines.

This section includes performance calculation details and benchmarks, risk metrics and evaluation, portfolio rebalancing guidelines and communications, reviews and reporting guidelines.

According to Ho, clients and advisors should review the investment policy statement on a regular basis, at least annually. “The IPS should be updated whenever a major life event occurs that could change a client’s investment goals or purpose for their wealth,” she says.

Investment policy statements: A critical part of wealth management onboarding

Creating an investment policy statement is part of the onboarding process for Ascent clients. “Every client is different, and we need to gather all the information we can about each client’s unique circumstances,” says Ho. This can take anywhere from a few weeks to a few months, depending on the complexity of a client’s financial situation.

Ho cautions that while many wealth management firms claim to create an IPS for their clients, not all investment policy statements are the same. “From a regulatory standpoint, many firms are required to have an investment objectives statement,” she says. “But this is not comprehensive and shouldn’t be confused with an investment policy statement.”

When creating an investment policy statement, your advisor will dig deep to understand your background and purpose for your wealth to devise a custom strategy for you and your family.

“This goes beyond managing money in a model or ‘cookie-cutter’ portfolio,” says Ho. “At Ascent, our service model is designed to build truly customized portfolios for our clients.”

Ascent Private Capital Management offers the high-touch, personalized approach of a boutique investment firm backed by the resources of U.S. Bank.