What Is an Investment Policy Statement (IPS) and How Do You Write One?

It helps to have everything in writing. Having a clear plan of action is one of the fundamentals of having a successful outcome. With a plan of action and an accurate view of your financial goals and expectations, not only do you ensure that you stay steady along the way, but you also keep financial anxiety and insecurities at bay. Maintaining an investment policy statement (IPS) provides you with these benefits, amongst others. This document can be a roadmap for you and your financial advisor that ensures that all your terms and conditions are met when it comes to your investments.

Read on to know what an investment policy statement is and how you can write one.

What is an Investment Policy Statement?

An investment policy statement is a document that states your investment goals, targets, and expectations. It provides information on how you want to invest your money, where you want to invest it, and how much you wish to invest. It offers your financial advisor an exact vision of your goals, so that they can make crucial financial decisions that align with your requirements. In some ways, an investment policy statement acts as a rule book for your financial advisor, letting them know how they should manage your funds.

What information does an Investment Policy Statement contain?

An investment policy statement can differ for different investors based on their goals, investment strategies, and risk capacity. The statement can be divided into two parts:

• Your personal objectives and your investment philosophy
• The kind of help and guidance you need from your financial or investment advisor

The first part that lays emphasis on your personal objectives and investment philosophy and generally contains the following information:

• The aim of your investment: The goal of investing is unique to every individual. While some people are looking to grow their wealth, others are just looking for a source of secondary income to meet their routine needs. You could fall into either of these categories. You could also be investing for definite goals such as a child’s higher education, or to buy a house for yourself.
• Time horizon: This section includes the timeline of your goals and whether you are looking at short-term investment options or long-term investment options. The time horizon largely depends on your investment goals.
• Asset allocation: This part includes the composition of your investments. For instance, the percentage of stocks, bonds, real estate, mutual funds, cash, etc.
• Liquidity and income needs: This section contains information on your income and liquidity needs. For instance, many investors bank on their investments as an emergency fund. In such a case, you need to have highly liquid and easily accessible investment options in your portfolio.
• Choice of investment type: This includes your investment type, such as an actively managed portfolio or a passively managed portfolio. In addition to this, the section also includes your investment preferences such as social impact investing, etc.

The second part that talks about the kind of help and guidance you need from your financial or investment advisor generally includes:

• Responsibilities of the financial advisor: This includes the responsibilities that you want your financial advisor to undertake. For example, decisions on where to invest, the execution, keeping track of your investments, and suggesting recommendations to alter your investment strategy if your goals are not being met.
• Deciding the asset allocation: The involvement of your financial advisor in deciding the asset allocation of your investments, in stocks, bonds, cash, etc.
• Monitoring the investments: This includes responsibilities like monitoring your investments, reporting the progress and growth of your funds, managing risk, diversifying and rebalancing your portfolio, etc.

How do you write an Investment Policy Statement?

Here are the steps you can follow to write your investment policy statement:

1. Start with your investing goals

It is important to put down your investing goals along with the time horizon for each. Here’s how you can start:

• Write your investment goals: Retirement, a child’s higher education, home purchase, travel, health care, etc. are some examples of different types of goals.
• Mention the time horizon: Retirement can be a long-term However, a home purchase or saving for a child’s education can be short-term goals depending on when you start investing.
• Set priorities: The urgency of each goal can be different. Your priority also depends on factors like your family’s needs, income, age, etc.

2. Mention the responsibilities and duties of your financial advisor

This section includes the help and guidance you require from your investment advisor. For instance, recommendations, monitoring, risk analysis and management, etc. This section should also specify the amount of flexibility or control you want your financial advisor to have over your portfolio and financial decisions. In addition to this, you can lay down your expectations from your advisor here.

3. Write down your investing strategy

This portion contains information on your investing strategy. Such as:

• How aggressive you want your investment strategy to be
• The kind of investment management style you are looking for – passive or active investing
• Your risk tolerance
• The asset allocation you prefer
• Your liquidity needs

4. Include your existing investments

Adding your existing investments and savings allows your financial advisor to gauge your future needs. It also allows them to know the current worth of your investments and recommend instruments that can help you gain better returns. You can include information such as:

• Your existing retirement accounts like an employer sponsored 401(k) account, an Individual Retirement Account (IRA), a pension plan, a life annuity plan, etc.
• Your savings account like a 529 education savings plan, bank accounts, certificate of deposits (CDs)
• Your real estate investments like a house, commercial property, etc.
• Your cash reserves

5. Specify your asset allocation and preferences

Mention the percentage of asset allocation you want on your portfolio under this head, i.e., the percentage of equity, debt, and balanced funds. For instance, your asset allocation can be

• 70% equity funds
• 30% debt funds

You can also mention your investment preferences, such as whether you want more stocks or more bonds. Additionally, you can write whether you are interested in traditional real estate investments or a real estate investment trust (REIT), etc.

6. State how and when to monitor your portfolio

This section can contain a wide range of subjects for your financial advisor that may include:

• The right time to revisit your asset allocation
• The threshold to monitor the performance of your investments
• The need for annual, monthly, or quarterly reports
• The need and level of diversification

7. Determine the acceptable costs and fees

Some investments and savings accounts can come with high costs, such as administration fees, management fees, fiduciary and consulting charges, etc. Moreover, the expense ratio of an investment can have a substantial effect on the returns. You can set a benchmark for these costs and specify what is acceptable and what is not. This gives your financial advisor an idea of which investments would be suitable for your needs.

8. Set a time and threshold for rebalancing your portfolio

Rebalancing refers to bringing your portfolio back to the asset allocation as it was when you started investing. For instance, if you had 60% equity at the beginning which has increased to 70% due to market fluctuations, rebalancing your portfolio will entail ways to bring your asset allocation back to 60% equity.

Not only is it essential to rebalance your portfolio from time to time, but it is also important to determine the right time for rebalancing. Moreover, fixing an acceptable range is also crucial. For instance, an increase or drop of 5% may be okay for you. However, anything beyond this should be a sign indicating the need for portfolio rebalancing.

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Why is it important to have an investment policy statement?

Drafting an investment policy statement can bring you many advantages. Some of these have been mentioned below:

• It states the role of the investment advisor: An investment policy statement clearly demarcates the role of the financial advisor in your financial plans. This eliminates the chances of overstepping boundaries or not being involved enough in your investment
• It acts as a guide: The statement provides both parties – the investor and the investment advisor with a roadmap to follow. This ensures that nobody transgresses from the main motive behind your investments.
• It helps in achieving your financial goals: Writing down your goals acts as a motivator to stick to your investment strategy and make sure that you reach your financial goals in the stipulated time.
• Brings forth the need for rebalancing: The various fluctuations of the market are better adapted and incorporated in your investment approach and methods with periodic rebalancing and reassessment.

To sum it up

An investment policy statement is a vital document in your investment journey. It can act as a guiding force that gives you accurate directives to follow. This ensures that you meet your financial goals as per the time horizon you have in mind. You can stay on track with your financial targets and make the most of your time and money spent on investing. Moreover, it is not limited to only when you hire a financial advisor. You can make an investment policy statement for yourself too. The document will offer the same advantages, and you will ensure that your financial goals are met.

If you need help in making an investment policy statement or with any other investment decision, you can reach out to a financial advisor for help and guidance.