An Investment Policy Statement (IPS) is an essential document that establishes a framework for investment decisions between a portfolio manager or financial advisor and their client. It serves as a formal agreement that articulates the client’s investment goals, objectives, and the strategies that should be employed to achieve them. This article explores the key components, purposes, and importance of an IPS while providing guidance on what investors should consider when drafting one.

What is an Investment Policy Statement (IPS)?

An Investment Policy Statement is a formal document that defines the managing rules between a portfolio manager and a client. It outlines the client’s general investment goals and specifies the strategies that the manager should employ to meet these objectives.

Key Components of an IPS

An effective IPS includes detailed outlines on several core components, such as:

The Purpose of an IPS

The main purpose of an IPS is to keep both the portfolio manager and the investor focused on long-term objectives rather than allowing emotional reactions to short-term market fluctuations to dictate investment decisions. By creating a systematic and structured approach to investing, an IPS facilitates:

Additional Information to Include in an IPS

To maximize the effectiveness of an IPS, additional information should be considered:

Example of an Investment Policy Statement

For a practical illustration of an IPS, consider the example provided by Napa Valley Wealth Management, located in Walnut Creek and Saint Helena, CA. Their IPS typically spans about a dozen pages and aims to ensure clarity and alignment between the firm and the client.

Sample Structure of a Napa Valley IPS:

  1. Introduction: A statement describing the purpose of the IPS and its role as a roadmap for ongoing investment decisions.

  2. Investment Objectives: A summary of the client's individual investment goals (e.g., retirement funding, education savings).

  3. Investment Strategy Overview: A detailed outline of the strategic asset allocation and risk tolerance.

  4. Monitoring Schedule: An agreed frequency for portfolio reviews and performance assessments.

  5. Appendices: Additional data, charts, or resources pertinent to the investment strategy.

Conclusion

An Investment Policy Statement is a critical tool for both investors and portfolio managers. It fosters clarity, consistency, and accountability in the investment process, making it easier for both parties to stay aligned with long-term goals. By thoroughly considering the elements to include and regularly reviewing the IPS, investors can navigate the unpredictable nature of financial markets with confidence, ensuring that their investment strategies remain focused on achieving their desired financial outcomes.