What Is an Investment Policy Statement?

Robert Wolfe
3 min readMay 19, 2022

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An investment policy statement (IPS) denotes a formal document signed between a portfolio manager or financial advisor and a client, outlining general rules and guidelines for the first to realize the latter’s investment goals. It lays the foundation for all investor’s future investment decisions and the advisor-client relationship.

An IPS serves as a strategic roadmap and ensures that all the involved parties are on the same investing page. It enables them to make informed decisions to see whether or not the portfolio achieves the stated investment objectives and consider changes. By setting a certain accountability standard for the advisors, IPSs also help minimize potential mistakes or misdeeds.

Portfolio managers routinely draft IPSs for institutional clients, including mutual funds and retirement plan sponsors. Many financial advisors will also do so for their clients.

IPS’ structure and content vary contingent on the particular client’s details and needs and the financial advisory firm. Generally, however, an IPS should contain the client’s financial objectives, asset allocation policy, and performance monitoring procedures. In addition, it should also outline the financial advisor’s responsibilities.

An IPS should state the investor’s investment objectives concisely. It should determine their risk/return profile, including pointing out preferred asset classes and those they would like to avoid. The IPS should also establish the client’s income needs and liquidity requirements and any tax, legal, or regulatory concerns. In addition, it should provide an investing time horizon and factor in any specific needs or circumstances. For example, an individual investor’s IPS may read that they would like to be able to retire by the age of 55 when their portfolio realizes at least a $100,000 annual return after taxes, in today’s dollar, and with a given inflation rate. Also, they have minimum tax liabilities and leave a considerable legacy to their twin sons.

As for asset allocation policy, IPS should specify the target allocation between the different asset classes (stocks, bonds) and further delineate the target allocation by sub-asset classes, such as global securities by geographical region. All stated target allocations should also have a minimum and maximum limit, which, when deviated, will prompt portfolio rebalancing. An example of target allocation may contain US stocks (large-cap 30 percent, mid-cap 10 percent, and small-cap 5 percent), international stocks (developed markets 15 percent, developing markets 5 percent), high-yield bonds (5 percent), real-estate investment trusts (10 percent), and cash equivalent (20 percent).

In terms of performance monitoring procedures, an IPS should institute a systematic review policy and processes that allow the investor to remain focused on the long-term goals, even in short-term market turbulences. It should include current information on the client’s account, asset allocation, accumulated amount, and the investment in various accounts.

Furthermore, an IPS should contain monitoring and control procedures that all parties involved in the investment must observe. These may include determining monitoring frequency, defining comparison benchmarks for portfolio returns, and establishing concrete actions for changing or not the IPS. While changes in the investor’s finances or lifestyle may necessitate altering the IPS, short-term market performance should not. Moreover, a comprehensive IPS should include actionable provisions that aid advisors in preventing clients conduct drastic and potentially harmful changes in cases of market downturns.

Finally, some examples of the advisor’s duties and responsibilities that may be present in an IPS are acting as a non-biased third party to help their client achieve their long-term financial objectives, discussing with the client and selecting the asset allocation, and ensuring enough diversification to balance risks and returns. Other advisor’s responsibilities include controlling and reporting all costs related to the investment and reporting every month about the securities, cash flow, returns, and changes in value.

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Robert Wolfe
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Robert Wolfe — Wealth Management Executive