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What is the purpose of an Investment Policy Statement (IPS)?

The purpose of an Investment Policy Statement is to describe the process to be used by the financial advisor or other fiduciary in making investment decisions. The financial advisor will follow the terms of the IPS as part of effectively supervising, monitoring and evaluating the investment objectives of the client. An IPS should be developed to:

  • State in a written document the expectations, objectives and guidelines of the investment options.
  • Establish an investment structure for the investment options to provide a sufficient level of diversification across asset classes and investment styles.
  • Provide guidelines for each of the investment options that address the level of risk and return, in accordance with stated objectives.
  • Establish formalized criteria to monitor, evaluate, and compare the performance results achieved by the financial advisor on a regular basis.
  • Encourage effective communications among the financial advisor, clients, investment managers, and other professional advisors.
  • Comply with the prudence, due diligence, diversification and other applicable fiduciary standards imposed by law.
  • Set forth general investment strategy including strategic asset allocation (i.e., which asset categories will comprise what percentages of the investment portfolio).
  • Establish rebalancing guidelines for when the actual asset category concentrations differ from percentages set forth in the investment policy.
  • In addition to setting forth the general investment strategy, the investment policy should also include information regarding strategic asset allocation and re-balancing guidelines. The strategic asset allocation section should set forth what percentages of the investment portfolio various asset categories are intended to comprise of. Rebalancing is the process by which, subject to the discretion of the responsible fiduciary, the buying or selling of certain investments will take place in order to restore the asset allocations to the IPS guidelines.

An Investment Policy Statement is the product of due and careful consideration by the financial advisor of the client and describes the fiduciary process that the financial advisor deems to be appropriate under the circumstances. While it guides the actions of fiduciaries, it should not prohibit the use of their discretion to ultimately make prudent investment decisions. Use the Investment Policy Statement Template to modify for use with your clients.