Investment Policy Statement
An investment policy statement (IPS) is a document drafted between a portfolio manager and a client. It outlines the rules and guidelines that the portfolio manager should abide by when considering asset allocation in the client’s portfolio. In other words, an investment policy statement states how a portfolio manager should try to manage the client’s money. A few examples of issues that are addressed in an IPS are asset allocation decisions, client risk tolerance, leverage, liquidity requirements, and foreign security investment restraints.
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Its main aim is to provide a framework for investment decisions made by the portfolio manager and also helps commit the client to a long-term investment strategy. An IPS acts to remind clients regarding the overarching goals and strategies of the portfolio while avoiding emotional decisions made by the client.
The components of an Investment Policy Statement are as follows:
- Scope and Purpose: IPS aims to establish and build context regarding the investor’s source of wealth. It should have the ability to identify and define the investor, and also a risk management structure. An IPS help in setting forth roles and responsibilities to be followed by the portfolio manager. Lastly, it should be able to assign responsibility for portfolio monitoring and reporting.
- Governance: It includes specifying responsibilities in determining, executing, and monitoring the results of the implementation of the investment policy statement. It also has to describe the process related to reviewing the updating the IPS, as well as to describe the authority in the hiring and firing of vendors associated with the portfolio. It also has to assign responsibility for determining the asset allocation of the portfolio, including inputs used and the criteria used to develop the inputs. Along with other assigned tasks it has to assign responsibility for risk management monitoring and reporting.
- Investment, Return, and Risk Objectives: It is expected to describe the overall investment objective. It has to state the return, risk, and spending assumptions (outflows of the portfolio). Finding the investor’s risk tolerance is also one of its tasks. It is also expected to describe relevant constraints such as liquidity requirements, tax considerations, restrictions on certain investments, legal constraints; and also describe any other considerations that may be relevant to the investment strategy.
- Risk Management: One of the main responsibilities is establishing performance measurements and reporting accountabilities. For risk management, it should be able to specify metrics used to measure and evaluate risk, as well as define the process for portfolio rebalancing and target asset allocations.
Keeping aside the goals, priorities, and preferences, a well-documented IPS will go onto establish a procedural review methodology which will further go on to enable the investors to remain focused on their long-term goals despite the times at which the markets seem unfavorable. An IPS contains all the information related to the accounts, asset allocation, and the amount accumulated, and the extent of the allocation made towards different assets which makes it quite an important tool.
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Providing investment counsel to individuals requires the need to address a variety of priorities and concerns along with paying heed to the absolute bottom line of investment performance. The investment strategy should be given topmost consideration in the context of the client’s overall financial plan, short- and long-term objectives, risk tolerance, and preferences. In the bigger picture, the potential complexity associated with taking all of these factors into account in an investment strategy requires a disciplined approach.
Author: Nishtha Bahal
About the Author: I’m an go-getter at life with the aim to collect small bits of knowledge from every part of the world.I see the world as a playground, full of swings and slides of different colors just waiting to be enjoyed upon. I believe that opportunities can be created rather than waited for, and I thus I dedicate every step of mine in the direction of constructing never-ending posssibilites for myself.