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What Is An Investment Policy Statement (IPS)?

Investment Policy Statement (IPS) Overview

An Investment Policy Statement (IPS) is a formal document that outlines an investor’s portfolio’s goals, objectives, and strategies. It is created between an investor and their financial advisor and serves as a guideline for making investment decisions. It outlines how the investor’s funds will be allocated, managed, and monitored.

How do IPS Work?

When a financial advisor and an investor create an IPS, they discuss the investor’s goals, objectives, and risk tolerance. The advisor will then create a plan for the investor’s portfolio based on these factors. The IPS will include information such as the type of investments to be made, the amount of risk the investor is willing to take, and the expected rate of return. The IPS also outlines the portfolio review process, the performance benchmarks, and the asset and liability allocation.

Who Uses Investment Policy Statement?

Individuals and institutions often use IPS investments with large portfolios, such as pension funds, endowments, and high-net-worth individuals. These entities often have large amounts of money to invest, so they need to have an effective way to manage their funds. IPS investments are also used by smaller investors, such as those with IRAs or 401ks.

Moreover, investment policy statements are beneficial for both investors and advisors. They provide a framework for investors to follow regarding their investments and help advisors manage and monitor their clients’ portfolios. IPS investments also help advisors recommend suitable investments for their client’s risk tolerance and goals. Additionally, IPS investments provide an easy way for advisors to track their clients’ performance, which helps them review their portfolios regularly.

Pros and Cons of Policy Statements (IPS)

The pros of IPS investments are that they provide a structure and guidance for investors and financial advisors, help advisors provide helpful advice to their clients, and provide an easy way to track and monitor performance. The cons of IPS investments are that they can be time-consuming to create, they can be difficult to revise and update, and they may limit an investor’s flexibility.

Investment Policy Statement Example

For example, if an investor has an extensive portfolio and is looking to retire in the next few years, they may want to create an IPS with their financial advisor. The IPS will outline the investor’s goals, objectives, and risk tolerance and provide guidance on allocating their funds and monitoring their portfolio performance. This will help the investor and their advisor make sure the investor is on track to reach their retirement goals.

How do you create an Investment Policy Statement?

  1. Determine the purpose of the IPS: Establish the purpose of your IPS, such as retirement planning, building wealth, or other investment goals.
  2. Set investment objectives: State the financial goals you would like to achieve with your investments.
  3. Analyze risk tolerance: Determine your risk tolerance to select the appropriate investment strategies and asset allocations.
  4. Establish asset allocation mix: Determine the mix of stocks, bonds, and other assets that best meets your investment objectives and risk tolerance.
  5. Establish guidelines for stewardship: Establish guidelines for how your investments are managed, including the types of investments allowed, rebalancing strategies, and when to rebalance.
  6. Create a timeline: Create a timeline that includes when to review and update the IPS.
  7. Establish reporting and performance parameters: Establish reporting and performance parameters, such as the frequency of performance reviews and the types of performance metrics used to measure success.
  8. Document the IPS: Writing down the IPS helps to ensure that all parties involved are aware of the objectives and agree on the details.
  9. Implement the IPS: Once the IPS is documented, be sure to implement it.

Next Steps

Check out our calculators and how to create one to strengthen your investments and take advantage of them! Or access our previous article to learn more about estate planning strategies!

About Valur

We have built a platform to give everyone access to the tax planning tools of the ultra-rich like Mark Zuckerberg (Facebook founder), Phil Knight (Nike founder), and others. Valur makes it simple and seamless for our customers to utilize the tax-advantaged structures that are otherwise expensive and inaccessible to build their wealth more efficiently.