What is Investment Policy Statement (IPS)
An investment policy statement can be defined as a drafted down document between a portfolio manager and the investing roadmap by outlining your financial aims and objective that deal with strategies with guidelines for achieving them.
An investment policy statement gives you access to stay on the right path as you move forward on some specific information on issues such as asset allocation, risk tolerance, and liquidity requirements included in an investment policy statement.
However, an investment policy statement can be simple or as complex as you desire, while it provides an overall vision of your investment strategy.
Breaking Down Investment Policy Statement (IPS)
Breaking down the investment policy statement only points to how IPS is constant but is not always used by financial advisors and investment advisors to outline an investment plan.
Another point is that IPS serves as a roadmap to successful investing and decision-making.
Clients willing to change direction with their portfolio whenever markets start to falter can be controlled by the IPS that contains only actionable provisions that are intended to be followed.
Importance of Investment Policy Statement
Three important investment policy statements that communicate a client’s investment goals and strategies will serve as guideposts for managing the portfolio.
- It provides appropriate guidance on portfolio constructions.
- It helps maintain focus on the client’s mandate and avoids deviations because of changing market conditions.
- It serves as a critical tool in keeping clients focused on their stated objectives.
Attached with an IPS, there are so many points, and it is written with broad investment objectives and risk descriptions, such as “low risk” and “conservative growth.” But these factors would translate into an asset allocation on standard deviation, correlation, and many more.
The way investment policy statement is being used depends on whether one is working within a modern or post-modern portfolio context.
Features of the IPS
Here are the following critical features for the investment policy statement.
- Return and Risk
- Investment Goal
- Asset Selection
- Asset Allocation
With the above features, an IPS can be more detailed. But the main aim is to stick to it for the desired results and not just compile it together.
Elements of the Investment Policy Statement
Scope and Purpose
- By identifying the investors.
- Setting out the roles and responsibilities of the financial advisor.
- By placing the risk management process.
- Creating and identifying the investor’s source of wealth.
- Allotting the responsibility for portfolio monitoring.
- Specifying the responsibilities in determining, executing, and monitoring the implementation of the financial plan
- Describing the process related to reviewing and updating the investment policy
- Representing the authority for changing the vendors associated with the policy
- Giving the responsibility for determining the tactical asset allocation of the portfolio, including the inputs used and the criteria for the development of input assumptions
- Offering the responsibility for risk management, monitoring, and reporting
Investment objectives, Risk and Returns
- Describing the overall investment objective of the clients/customers.
- Stating the assumptions regarding risk and returns and spending distribution of investors.
- Defining the investor’s risk tolerance level.
- Mentioning related constraints like liquidity requirements, tax considerations, restrictions on specific investments.
- Citing any other rules or provide information relevant to the investment strategy.
Management of Risk
- Establishing performance measurement metrics.
- Indicating the metrics used to measure and evaluate the risk.
- Describing the process for portfolio re-balancing.
Whenever investors want to stay on course to meet their long-term financial goals, it is imperative to create an investment policy statement.
The outcome helps in maintaining the portfolio in line with the investment objectives within a specific time horizon.
Continuous monitoring also helps to re-balance the portfolio based on market conditions.