Investment Policy Statements: Why Have One?

A traditional and popular concept in achieving goals – financial or otherwise -- is to actually write them down.  The act of writing, itself, helps clarify and reinforce one’s objectives.  And the physical list can then serve as a reminder and monitoring device to keep one on track.

In simple terms, that’s what an investment policy statement, or IPS, is all about.  In the world of financial planning, an IPS is a written summary of a client’s investment philosophy and objectives.  It addresses factors such as the client’s long-term goals, risk tolerance, cash flow considerations, asset allocation constraints, timeline, and targeted return objectives.

An IPS is not so much a document designed for the financial advisor, as it is a document designed by and for the client.  However, a completed IPS helps advisors to be sure they are “on the same page” with clients – that they have correctly understood a client’s philosophy in these varied and important areas.   

At Thorley Wealth Management, clients do not have a single IPS, but rather might an IPS for every managed account in their portfolio.  (Clients may access these on Investor360).  This is important, because an IPS for an account seeking to build retirement assets might be considerably different from an account designed to pay for a child’s college education.  The goals are different, the timelines are different, and it is highly likely that the investment policy factors in these two accounts would also be different – and therefore the account is managed in a different way.

The major benefit of an IPS, I believe, is keeping clients focused on maintaining a disciplined process for investing their money, and not getting carried away by emotions when markets become erratic. 

An IPS is not a contract, nor is it legally binding in any way.  But it can greatly help advisors manage client expectations as we build and maintain a portfolio’s allocation.  And, as with any working document, the IPS should be reviewed on a regular basis to account for any changes in a client’s situation or objectives.  In other words, it must be flexible.