Most people have investment goals, and the path to achieving these goals is unique. What is an investment policy statement? A well-crafted investment policy statement (IPS) functions as a roadmap, outlining the path you intend to follow to achieve your investment goals. An IPS helps ensure you and your investment management team are on the same page regarding your investment goals and strategy.
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What is an investment policy statement?
An investment policy statement describes your financial goals and objectives. It should include the following information:
- The scope and purpose of the investment portfolio.
- The roles and responsibilities of everyone on your investment team, including their fiduciary obligations, investment selection criteria, and performance monitoring.
- Your investment objectives and constraints, including risk tolerance, short-term liquidity needs, and long-term rate of return.
- Expectations for how your assets will be managed.
- Benchmarks for how investment choices will be evaluated. Each index mutual fund or exchange-traded fund should have its return compared with its related benchmark. Any deviation from the benchmark should be evaluated and discussed annually.
- A communication plan for relaying current investment performance and ensuring transparency and accountability throughout the process.
Anyone can have an investment policy, but it is especially important for people with vast wealth and complex financial investments.
An IPS is a living document that adapts to the changing market environment and your evolving financial needs and goals. An investor and their financial advisor typically meet at least once a year to evaluate their investments and make any necessary adjustments.
How does an investment policy statement contribute to portfolio management?
An investment policy statement is the starting point for developing and managing a portfolio. It sets forth guidelines on how your portfolio should be constructed, managed, and evaluated.
Your investment team uses an IPS to make investment recommendations and decisions. It ensures that you and your investment team understand why certain investments are chosen and that they align from the onset of investing and throughout the process.
Why is an investment policy statement important?
An investment policy statement is an agreement between an investor and their financial advisor. It outlines the investor’s objectives, the financial advisor’s duties and responsibilities, portfolio selection guidelines, a policy for rebalancing asset allocation, and performance monitoring.
An IPS is a living document that provides an investment roadmap that helps with investment decision-making, especially when the market is turbulent. It can prevent rash financial decisions guided by emotions instead of a thoughtful plan.
Do you need an investment policy statement?
Every investor is different, and the same investor may have different goals at different points in their life. An IPS allows you and your financial advisor to outline your goals and the steps you will take to meet them.
As in many aspects of life, it is much easier to judge your progress towards meeting a goal if you have defined what your goals and objectives are and your strategies to meet these goals.
Talk with a financial advisor about an investment policy statement. This important document will ensure that you and your financial advisor fully understand your financial goals and needs. Based on your risk tolerance and retirement plans, they can help ensure your assets are spread across many different securities to help stabilize and grow your financial portfolio.
Fee-only financial planning is an ideal option for people who want to develop an IPS with their financial advisor. Unlike commission-based financial planning, a fee-only financial planner will charge their client directly for their services. This helps ensure that the goals and interests of the client and financial advisor remain aligned and are not influenced by commissions earned on financial products.
There is no one-size-fits-all guide to investment. Working with a wealth manager can ensure you make the best financial decisions for yourself and your loved ones.
