An investment policy statement, denoted IPS, is a document that is drawn up between you and your portfolio manager, which outlines specific objectives, guidelines, goals, and strategies that the portfolio manager must follow to effectively manage and meet your financial goals. The IPS is widely used for clients who have large (i.e. corporations) and small (i.e. individual clients) portfolios and is tailored to fit each individual/company investment needs.
There are two forms of an investment policy statement that are used; personal and corporate IPS’s.
The personal IPS is an agreement between the portfolio manager and a client who holds a single portfolio. It encompasses the client’s needs and desires regarding their investment portfolio and what the manager can or cannot do to achieve these desired results. Thomas Collimore, a CFA and Director for Investor Education, outlines that personal IPS’s are not widely used because individual investors wish to take the route of personally depositing regular contributions into their investments and hope that their investments generate enough wealth for them to retire when they are ready. The problem is that this is a very risky venture and many investors find that they have to delay retirement, because they chose not to draw up an IPS.
The Corporate IPS is widely used by investors who hold more than one investment portfolio. Generally employers will have accounts such as their employee pension plans, 401K plans, and life insurance plans that will need to be managed effectively and will need to reach desired results within a certain time frame. So employers will draw up an IPS to ensure the investment goals, under these specific accounts, will be met.
A comprehensive IPS can be as long as 8-15 pages long and will generally include the following core sections: 1) Account information section that will be used to list the accounts that will be managed, 2) Investment objective section which will outline what the investor wants their portfolio to accomplish, 3) Risk tolerance provides the investors risk percentage that they will allow on new/existing investments, 4) Monitoring procedures will list the strategies the manager will follow to achieve the desired results 5) Rebalancing guidelines section will include inflation on the timeframe (i.e. annually) that the investor will change, review, or evaluate the portfolio’s existing guidelines. Investors should always keep in mind that the core sections of an IPS should be updated when life events change (i.e. divorce, new child, and death).
The overall advantage to having an IPS is that investors are able to build a so called disciplined blueprint of how they want their investments managed to achieve their overall desired results. It helps them achieve their long-term financial goals and allows them to effectively monitor the performance of their overall investments. Also if an investor experiences any major life event, their portfolio can be updated to reflect these changes and they can monitor the effects that these changes might have on the performance of their investments.
Collimore claims that the main disadvantage of not having an IPS is that investors have a hard time achieving their financial long term goals, because all their investment decisions are based upon day to day events. They have no formal strategies in place to help them achieve their long term focus, thereby, generally leads them to chase only short term performance goals.
Overall, an Investment Policy Statement (IPS) is a strategic investment plan that encompasses the goals and objectives that a client wishes to achieve and the strategies the portfolio manager will employ to meet these specific goals and objectives. An IPS could lead the investor to a misconception that it is a guarantee that their overall long-term investment goals will be achieved. So for example, a client might have the financial goals to be retired, earn $50,000 annually on their investments, and have $200,000 invested in Roth IRA’s and US savings bonds by the time they are 55. Their personal IPS would list each one of these goals and the strategies to achieve these goals, but does not put a guarantee on whether or not these financial goals will be met within the given time frame.
Collimore, T. (2010). A Battle Strategy for Your Financial Future