The Investment Policy Statement is one of the most important financial documents you should have in my opinion. I've written about it many times on previous iterations of my website. This go around, I will simplify it to make it easier to understand it's importance. If you have worked with me in the past then you know that I stress the importance of this document. I have attached a sample IPS from one of the firms I use to create client portfolios. They were formally known as Loring Ward, so you sill see that name referenced in the sample IPS. They have recently changed their name and are now known as Buckingham Strategic Partners.
The Investment Policy Statement
The investment policy statement (IPS) is an essential document for many reasons. The IPS serves as an investment guidebook, not only for the investment advisor, but also for the investor and the custodian, (the company that physically holds your investment assets). Having all parties on the same page, working together toward supporting the mission of the of the portfolio and your goals, helps ensure greater success. A properly written IPS also helps fulfill the fiduciary duty by stating in writing a prudent process for managing assets.
A comprehensive IPS does not need to be complicated and lengthy, but it should include the following sections:
1. Your Portfolio Objectives
This section will include what your goals, income requirements, liquidity requirements and time horizon are. Stated in writing, the investment criteria will be tailored with those objectives in mind.
2. Your Tolerance for Risk
This section clearly illustrates the amount of risk you are willing to take as an investor. Your comfort level with investment risk influences how your portfolio will be invested. This particular section is one I refer my clients back to when markets are very volatile. They may have a portfolio that is down 10% but may not remember they were willing to accept a 20% loss when we originally set up the portfolio. It's a good reminder to help clients not make emotional investment decisions.
3. Asset Class Allocation
This is your recommended portfolio and illustrates the different asset classes we will using in the portfolio. In other words, this is the portfolio that has been created to satisfy points 1 and 2 above.
4. Your Recommended Investment Strategy
This section will show you the historical returns of the recommended portfolio along with the average annual return over a certain period. It will also show the downside potential, (the biggest losses it has suffered) and the upside potential (the best gains the portfolio has had).
5. Roles and Responsibilities
Perhaps the most important section of the IPS is who is responsible for what. In writing, you will see the roles and responsibilities of not only the advisor and the custodian, but guess who else? You. Yes, that's right, you as the investor also have a role to play in achieving your objectives. This helps ensure that we keep an open line of communication.
6. Portfolio Maintenance, Oversight and Signatures of Acceptance
This section includes reporting, (statements and tax documents), along with rebalancing and communication information. Lastly, once you agree with all of the written information above, you will then be asked to sign and date the document. As I stated earlier, this is a document we will refer back to often. Having it signed and dated is very important.
7. Disclosures and Appendixes
This section explains general investing and how markets work.Summary: