What is an Investment Policy Statement (IPS)?
An Investment Policy Statement (IPS) is a written document that establishes the guidelines, objectives, and constraints for managing an investment portfolio. It serves as a roadmap for investment decisions and a communication tool between the advisor and client, documenting the agreed-upon approach to achieving financial goals.
Key Components of an IPS
1. Client Profile
- Investment objectives
- Time horizon
- Risk tolerance
- Liquidity needs
- Tax considerations
- Legal/regulatory constraints
2. Investment Guidelines
- Asset allocation targets and ranges
- Permitted investment types
- Prohibited investments
- Rebalancing parameters
- Benchmark selection
3. Roles and Responsibilities
- Advisor duties
- Client responsibilities
- Review and monitoring schedule
Sample Asset Allocation Section
| Asset Class | Target | Range |
|---|---|---|
| US Equities | 40% | 35-45% |
| International Equities | 20% | 15-25% |
| Fixed Income | 30% | 25-35% |
| Alternatives | 10% | 5-15% |
Benefits of a Well-Crafted IPS
For Clients:
- Clear documentation of goals
- Protection against emotional decisions
- Framework for measuring success
- Basis for advisor accountability
For Advisors:
- Defense against complaints
- Foundation for investment decisions
- Client education tool
- Demonstrates professionalism
Best Practices
- Review and update annually
- Document any changes and rationale
- Use clear, jargon-free language
- Include specific, measurable objectives
- Address how to handle market volatility
