The Value of an Investment Policy Statement

For investors, the Investment Policy Statement (IPS) may be the best tool for defining where they want to go and how they expect to reach their destination. In this post we will be discussing the benefits of an IPS.

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The Value of an Investment Policy Statement

The Value of an Investment Policy Statement

“Would you tell me, please, which way I ought to go from here?”
“That depends a good deal on where you want to get to.”
“I don’t much care where –”
“Then it doesn’t matter which way you go.”
— Lewis Carroll, Alice in Wonderland

Lewis Carroll was not a trained financial professional, but he understood the folly of trying to get somewhere without a clear idea of where you were going or how you were going to get there. For investors, the Investment Policy Statement (IPS) may be the best tool for defining where they want to go and how they expect to reach their destination. In this post we will be discussing the benefits of an IPS.

What is an IPS?

An IPS is the blueprint that steers all future investment decisions, acting as a North Star or fixed point, to guide individuals in their long investment journey by identifying goals and creating a systematic review process.  It is the backbone of a disciplined long-term investment program.

An IPS generally contains several elements, including:

  • Account information, such as where assets are located, how they are divided up between taxable and tax-advantaged accounts, and ongoing contribution activity.
  • Investment profile, specifically investment objective, time horizon and risk tolerance.
  • Investment parameters, including what asset classes are to be used and avoided, allocation targets and ranges for each asset class, and rebalancing time frames.
  • Monitoring and control guidelines that outline investment review frequency, appropriate comparative benchmarks, permitted deviations from benchmarks (in amount and over time), and the process for making changes to the IPS.

The Benefits of an IPS for Investors

An IPS can benefit investors in a number of ways, including:

  1. Keeping investors focused on long-term objectives, rather than on short-term volatility
  2. Helping individuals maintain investment discipline by protecting them against their worst instincts, i.e., selling when markets are falling or taking on too much risk when markets are frothy
  3. Measuring progress toward objectives, and monitoring overall portfolio performance and individual investment managers

The Benefits of an IPS for Advisors

Advisors also reap rewards for developing an IPS for each client, such as:

  1. Supporting the advisor in times when clients want to change the agreed-upon investment direction based on short-term market performance
  2. Reducing potential tensions at annual review time, so when clients express disappointment “at lagging the market,” an advisor can refer to the IPS and ask the client if anything has changed since he or she agreed to the investment parameters
  3. Solidifying adherence to a fiduciary standard by grounding investment advice in a written, process-driven process

A common objection to creating an IPS is that it can become a compliance liability should an advisor fail to follow its terms. To avoid this, any IPS an advisor develops should only include guidelines that an advisor intends to follow.

See referenced disclosure (2) (3) at http://blog.americanportfolios.com/disclosures/ 

 

About The Author

Tim O’Grady

 

President of Sales and New Business Development 
631.439.4600, ext. 285 

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