An Example of an Investment Policy Statement

What Is an Investment Policy Statement?

An investment policy statement (IPS) is a strategic document used by financial advisors to outline guidelines that can help launch and manage a client's investment program.

It can be an important and useful tool because it lays the foundation for a client-financial advisor relationship and provides an objective course of action. The IPS details include how the advisor will make investment decisions. A solid IPS is a guide to your financial future.

Many financial advisors have their own version of an investment policy statement. They can then tailor it to the specific financial and investment situations and perspectives of individual clients.

Components of an Investment Policy Statement

An IPS is a map, activity schedule, and outcome document between a financial advisor and a client. The first section of the statement includes the client’s broad investing goals and objectives. The next component discusses the path that the advisor, in collaboration with the client, follows to reach a set of goals.

The details include topics such as asset allocation, risk tolerance, and financial goals.

An Example of an IPS

Take a look at the following fictitious example of an investment policy statement.

Investor First Advisory, LLC Investment Policy Statement for Juan Martinez

Executive Summary:

Juan Martinez, Individual Investor, age 55

Portfolio: Individual, Taxable

State: California

Tax ID: xxx-xx-xxxx

Current Assets: $500,000

Return Goal: 6%

One-year loss limit (worst case scenario): 15% to 18%

Objectives:

• Long-term growth and capital preservation
• Risk profile: Conservative
• Time horizon: Greater than five years
• Short-term liquidity needs: None
• Long-term rate of return expectation: 6% (based upon historical rates of return)

Financial Advisor Duties and Responsibilities:

• Fiduciary; unbiased third party charged with helping clients meet long-term financial goals.
• Confer with the client to create asset allocation.
• Select assets in accordance with asset allocation providing sufficient diversification of risk and returns.
• Control and report all investment costs.
• Monitor all investment options and the portfolio custodian. (The custodian is responsible for the safekeeping of the client’s assets.)
• Value all portfolio holdings on a regular basis.
• Provide monthly reports that include securities, cash flow, income, and the monthly change in value.

Portfolio Selection Guidelines:

In general, long-term investment performance is determined by asset performance. Historically, stock assets offer higher rates of return along with greater volatility. Fixed-income assets generally yield lower rates of return, have a lower correlation with equities, and have less risk. Diversification across asset geography and size is recommended.

Based on the client’s conservative risk profile, the portfolio asset allocation will be 60% stock assets and 40% fixed.

The individual composition of holdings will be selected from index funds and exchange-traded funds from the following asset classes:

Equity

• U.S.
• High-Dividend
• Value
• Small Cap
• International, including developed and developing markets

Fixed

• U.S. Bonds
• Corporate Bonds
• Government Bonds
• High-Yield Bonds
• Real Estate Investment Trusts (REIT)
• Global Bonds
• Global REITs

Rebalancing of Asset Allocation:

According to data from Vanguard, there is no universally agreed upon asset allocation. Neither is there data to recommend rebalancing more frequently than annually. Thus, the portfolio will be rebalanced annually, while attempting to minimize the tax consequences of asset sales.

Performance Monitoring:

Each index mutual fund's or exchange-traded fund's return will be compared with its related benchmark. Any deviation from that benchmark will be evaluated and discussed annually. The holdings will also be compared with peer group funds. 

The parameters for selling a fund due to poor performance include one year of greater than 1% deviation from the benchmark and/or falling in the bottom half of the cohort fund group.

Costs will be monitored annually to ensure that total costs do not surpass 1% of all investable assets.

The overall portfolio will be monitored annually, at a minimum, to consider whether initial goals are in place or have changed. Performance and fees will also be included in this conference. Together, Mr. Martinez and the advisor will determine the future portfolio direction.

The Bottom Line

An investment policy statement is personal and customized for the circumstances of the advisor’s client. The previous example is one type of IPS. Each financial advisory firm will have its own version.

Large investment brokerage companies also have investment policy statements for their individual mutual funds and/or client groups. The investment policy statement keeps both the client and advisor on the same investing page and holds the advisor accountable to a certain standard.