Your Investment Policy Statement

investment-policy-statement

Your Investment Policy Statement

By Investing , , 14 Comments

An Investment Policy Statement (“IPS”) defines your investment objectives, addressing the fundamental question, “What is the purpose of investing?” This might seem straightforward to some (isn’t the answer “make money”?) But, for wealthy investors and charitable foundations, the goals of investing often extend beyond mere financial gain.

This post will describe what an investment policy is and why it’s a fundamental building block for a successful investment portfolio. We will also describe how to draft an investment policy including the key topics to cover. For wealthy investors, their advisors, charitable foundations, and other stakeholders to your financial success, an investment policy statement is necessary to guide thoughtful decisions and evaluate outcomes objectively.

Guiding Professionals and Family Members

A well-crafted investment policy policy helps your family, investment managers, accountants, lawyers, and bankers understand and align with your goals. Your investment policy statement sets the tone for your entire investment portfolio. It also ensures that family members are on the same page during discussions about investment strategies. Since, by clearly defining objectives, target asset allocation, and review process, an investment policy statement enables more productive input from all stakeholders, facilitating better decision-making.

Reducing Investment Risks

Investors without a written investment policy are more prone to making ad-hoc emotional decisions. This leads to suboptimal returns prone to bias. Investors without a written investment policy are also more vulnerable to fraud, high fees, and conflicts of interest. Conversely, a written investment policy statement provides a framework to guide investment decisions and evaluate outcomes, helping to choose the most suitable investments and managers in the process. When you come to your investment advisors written investment policy statement, you are in control. Instead of the investment advisor tail wagging the portfolio dog.

Defining Your Values

The first and most challenging step in drafting an investment policy statement is defining your investment values and objectives. This discovery process involves discussions with investors and other information-gathering methods like questionnaires and fact finding discussions. For multi-generational families, advisors might canvass multiple family members to capture a broad spectrum of values and objectives before codifying them. The good news is that once your values and objectives are determined, the rest of your investment policy becomes fairly easy to define.

Key Components of an IPS

Once investment objectives are defined, the main sections of an investment policy statement can be drafted, including:

  • Objectives
  • Asset Allocation
  • Performance Measurement
  • Re-balancing

Other crucial aspects to cover include risk tolerance, time horizon, and target rate of return.

Using an Investment Policy Statement

After drafting an IPS, it’s essential to share it with your advisors, especially your investment advisors. Wealthy investors typically have multiple managers specializing in different asset classes. Because, each advisor should understand their role in achieving the overall objectives to provide appropriate advice.

Accountants, lawyers, and bankers also benefit from understanding their client’s investment objectives. For example, estate planners can give better advice when they understand the client’s investment goals, simplifying their tasks and ensuring consistency.

Evaluating Performance

A written investment policy defines performance reporting and evaluation criteria, providing a basis to assess investment outcomes against benchmarks. This helps distinguish between actual performance and market-wide movements, ensuring transparency and accountability.

Our Approach to Investment Policies

Our family office helps investors define their objectives and craft custom Investment Policies. Investment Policy Statements drafted by our family office typically consider ESG issues, such as environmental sustainability or income to support your lifestyle. Our family office has more than a decade of experience drafting investment policy statements. We specialize in helping investors with more than $100 million in their investment portfolio. Learn more about our approach by contacting us here.

To receive a personalized investment policy fill out this quick form:

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