What Are Investment Policy Statements?

And Why Should You Read Them?

What Are Investment Policy Statements?
March 5, 2014

An investment policy statement (IPS) is a formal document that outlines the relationship between a financial advisor and a client. It summarizes the financial goals of the client, and answers the basic what/where/when and how questions of his or her asset allocation strategy. Although an investment policy statement should be an essential tool in establishing and maintaining a healthy financial advisor-client relationship, many investment firms fail to draft such documents. So, what exactly is included in an investment policy statement and why should you read it? This article summarizes the reasons for requesting an IPS and monitoring whether your advisor is conforming to it.

What is in an Investment Policy Statement?

Financial advisors use Investment Policy statements to record their clients’ financial goals and ensure their actions do not deviate from these objectives. The document includes the following information:

  • Statement of Overall Financial Goals - The IPS should state exactly what you have in mind for your finances. Whether it is being able to retire early, save for a down payment on a house, or invest for your business, it should be specified in the document. The Investment Policy statement should also indicate whether these investing goals are long-term or short-term, if the accounts will be tax-deferred or not, as well as the expected timeframe and required assets to achieve these goals.

  • Identification of Liquidity Requirements and Risk Tolerance – is also an essential feature of the IPS.

  • Composition of the Investment Portfolio - The likely mix of stocks, bonds, mutual funds, exchange-traded funds or other financial assets you will own should be described in detail in the IPS. The document should also indicate what the asset allocation model might look like over time, including anticipated rebalancing to meet your stated objectives.

  • Return Projections – While it is impossible for any financial advisor to assure the performance of any specific investment, the IPS will likely contain portfolio return assumptions that will support the fulfillment of your financial objectives.

Why Should I Read My Investment Policy Statements?

  • The IPS can Enhance Peace of Mind - It can be stressful to leave your hard-earned money in the hands of a financial advisor. Asking for a written IPS and consulting it from time to time is a way to ease that stress by assuring that your advisor is complying with your plans and instructions.

  • The IPS Builds Consistency - Another advantage of reading your Investment Policy Statement is to revisit the financial goals that you established earlier and evaluate how far you have come toward meeting them. When you fail to review your long-term portfolio performance and objectives, it is easy to panic when the market fluctuates and make investing decisions that you may regret later. The IPS is a great document to help you stay on track with your investments.

The Investment Policy Statement is essential to building a long-term investment strategy and healthy relationship with your financial advisor. Make sure to ask for such documents to be written when you buy services from an investing firm. If you are investing on your own, it is also a great idea to write one for yourself. It can be a useful way to ensure you meet your short and long-term financial goals.

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