How to Create a Client Investment Policy Statement

What is an Investment Policy Statement (IPS)?

A Investment Policy Statement (IPS) is basically a business plan for an investment portfolio. It is very common for financial advisors to create an IPS for their institutional clients such as retirement plan sponsorsfoundations and endowments. Many financial advisors will also write one for their individual clients.

Having an IPS makes it easier to avoid panic selling and account for market corrections. By following a pre-established and written game plan, these investors can put their emotions aside and follow the rules already established for their assets.

Key points to remember

  • An investment policy statement (IPS) is a formal document that outlines the general investment rules for a portfolio.
  • An IPS is frequently used by pension funds, endowments or foundations to guide investments based on client values ​​and goals.
  • An IPS should outline the client’s investment goals and objectives, as well as the strategies the manager can employ to achieve those objectives.
  • An IPS should also include information on allocation, risk tolerance and liquidity requirements.
  • An IPS will have different scope and content depending on the type of client or investor involved, from individuals to pension schemes and charitable foundations.

How an Investment Policy Statement (IPS) Works

An investment policy statement provides a roadmap for how clients should invest their money. Which asset classes should be considered? What types of investment vehicles should you consider? These could include exchange traded funds (AND F), mutual fundand other vehicles.

Additionally, an IPS will establish a target asset allocation for the portfolio. It will take into account the investor’s time horizon for the silver and its risk tolerance. There should be criteria for selecting new investments and also criteria for replacing them.

In addition to clarifying the investor’s objectives, priorities and investment preferences, a well-designed IPS establishes a systematic review process that allows the investor to stay focused on their long-term goals, even when the market moves in the short term. It must contain all the information about the current account, the current allocation, the accumulated amount and the amount currently invested in the various accounts.

Investment Policy Statements for Individual Clients

An IPS for an individual client should be an extension of their financial plan. This should reflect their reasons for investing, such as saving for college or retirement, as well as the client’s time horizon, risk tolerance, and level of return needed to achieve those goals. These criteria will lead to the establishment of a target asset allocation and the types of investment vehicles to be used.

Generally, the target allocation will include a range of values ​​for each type of asset. For instance, large cap stocks can have a target allocation of 20% with an acceptable range of 15% to 25%. If the actual percentage of large-cap stocks falls outside this range, the investor can rebalance their portfolio.

The IPS should also include criteria for selecting, monitoring and replacing different investment vehicles. These may include performance against their peer group, costs, management changes (for ETFs and funds) and other relevant criteria. The financial advisor and client should also agree on a benchmark measure that will be used to track portfolio returns.

Many municipal or local governments use an investment policy statement to decide how to invest their budget surplus.

Investment Policy Statements for 401(k) Plans

As part of a 401(k) plan, an IPS serves a similar but slightly different purpose. Writing an IPS is one of the first things an advisor will do for a 401(k) plan sponsor. If an existing plan already has an SPI in place, the advisor should review this document and make revisions (or start from scratch) as needed.

The IPS must state the purpose of the plan and the types of investment vehicles the plan can purchase, such as mutual funds, group trustsstable value funds and managed accountssuch as target date fund or risk-based options.

The primary reason a 401(k) plan sponsor needs an IPS is to fiduciary protection. The IPS should document the procedures that the plan sponsor and advisor will follow when managing the plan’s investments. When the investment committee meets, it should document what happened and how its decisions reflect the IPS process.

The IPS should also indicate how often the investment committee will meet to review the plan and who the plan’s service providers are. It should indicate that these service providers will be reviewed periodically. The IPS must also specify the criteria that will be used to select, monitor and override the investment options used in the plan.

Although it may appear that a 401(k) IPS benefits the plan sponsor and mitigates their fiduciary responsibility, a 401(k) plan that follows a well-designed IPS will generally provide better returns than one without.

IPS for pensions, endowments and foundations

Endowments and charitable foundations use their investment portfolio to finance their operations, while Pension the funds invest to provide higher savings to their beneficiaries. These types of institutions need an IPS similar to a 401(k) plan, in that it must list all service providers and plan information.

An IPS for these institutions should define the criteria for selecting, monitoring and replacing the plan’s investments, as well as the allocations for the various assets and the target rate of return. For endowments and foundations, there should be language regarding the target level of annual withdrawals.

In some cases, the plan may also impose restrictions on the types of investments permitted. For example, an environmental organization’s SPI might specifically exclude certain polluting industries.

As with other plans, an institutional IPS should define performance monitoring criteria based on a pre-established baseline. This provides a level of fiduciary protection for pension plan sponsors and the investment committees of endowments, foundations and other not-for-profit organizations.

What is the purpose of an investment policy statement?

An investment policy statement provides a strategic roadmap for managing the client’s investments, allowing the portfolio manager to find the best assets to achieve the client’s financial goals. Having a clear IPS also makes it easier to avoid emotional trading during volatile times.

What should an investment policy statement (IPS) include?

A investment policy statement should define the investor’s objectives and risk tolerance, the duties of the financial adviser and the guidelines regarding the assets that may be purchased. Typically, this will include a list of acceptable asset classes and the target allocation for each. The IPS should also set benchmarks to measure portfolio performance and often indicate that it needs to be rebalanced.

How often should an investment policy statement (IPS) be updated?

The frequency of IPS updates should be determined by customer needs. However, the CFA Institute recommends updating an IPS at least once a year, as well as whenever there are significant changes in the client’s circumstances. For example, a major change in a client’s health, wealth, or number of dependents should result in an update to that client’s SPI.

The essential

An investment policy statement is an excellent tool for financial advisors to create a roadmap for managing client portfolios. Although the format may vary, an IPS also applies to individual clients, 401(k) plan sponsors, and other institutional clients such as pension plans, foundations, or endowments.

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