Investment Policy Statement

Get It in Writing: Investment Policy Statements
by A. Scott White, CFP®, ChFC, CLU

The current economic woes have vastly altered the public’s approach and attitude toward investments and financial planning. Many people are seeking more information about working with a financial planner or financial advisor.

One positive outcome of the economic crisis is the recognition of the importance of a written Investment Policy Statement (IPS). An IPS is a clear, written document articulating the investment objectives and policies applicable to you, the investor, and your investment portfolio.

Even though investments are only a part of the services offered by a financial planner, they are a vital component since a thriving portfolio generates the cash flow that enables you to live the lifestyle you desire—today and in the future. A comprehensive and thorough IPS accomplishes the following goals:

  • Defines the responsibilities of the investor and the financial advisor
  • Encourages effective communication between the investor and the financial advisor
  • Establishes and documents the investor’s expectations, objectives and guidelines relevant to the investment of the portfolio’s assets
  • Creates a framework for a well-diversified investment asset mix that has the potential to generate long-term returns at an acceptable level of risk
  • Describes an appropriate risk profile
  • Specifies the target asset allocation
  • Establishes investment guidelines regarding the selection of investment managers, permissible securities and diversification of assets
  • Specifies the criteria for evaluating the performance of the portfolio’s assets

The IPS summarizes the investment philosophy and the procedures used by your financial advisor. You develop it through discussions and meetings with your financial advisor. The final version of the IPS should reflect your current status and investment philosophy as defined with your financial advisor. The process for developing an IPS follows a similar path to that financial planning:

    1. Assess your financial condition
    2. Set goals
    3. Develop a strategy designed to meet those goals
    4. Implement the strategy
    5. Regularly review the results and adjust as needed

Ideally, the IPS, like life, is also dynamic. It needs to be reviewed and revised periodically with your financial advisor to adjust and reflect any changes related to the portfolio, your personal situation or to the capital markets.

In essence, your IPS exists as a guide to remind you not to make unplanned and impulsive revisions of a sound long-term policy developed with your financial advisor. As a result, you’re more likely to approach your investments in a more disciplined and systemic fashion—and increase the probability of meeting your financial goals.