Your Investment Policy Statement
An Investment Policy Statement (“IPS”) defines your investment objectives, addressing the fundamental question, “What is the purpose of investing?” This might seem straightforward, but for wealthy investors, the reasons often extend beyond mere financial gain. For wealthy investors, objectives frequently include such values as supporting environmental sustainability, promoting gender equity, and fostering a fair and democratic society.
Guiding Professionals and Family Members
A well-crafted IPS helps investment managers, accountants, lawyers, and bankers understand and align with your goals. It also ensures that family members are on the same page during discussions about investment strategies. By clearly defining objectives, an IPS enables more productive input from all stakeholders, facilitating better decision-making.
Reducing Investment Risks
Investors without a written IPS are more prone to making ad-hoc decisions, leading to suboptimal returns. They are also more vulnerable to fraud, high fees, and conflicts of interest. Conversely, a written IPS provides a framework to guide investment decisions and evaluate outcomes, helping to choose the most suitable investments and managers.
Defining Your Values
The first and most challenging step in drafting an IPS is defining your investment values and objectives. This discovery process involves discussions with investors and other information-gathering methods like questionnaires. For multi-generational families, advisors might canvass multiple family members to capture a broad spectrum of values and objectives.
Key Components of an IPS
Once investment objectives are defined, the main sections of an IPS 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 IPS
After drafting an IPS, it’s essential to share it with your advisors, especially 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 IPS 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 Policies typically consider ESG issues, such as environmental sustainability. We work with wealthy investors and charitable foundations. Learn more about our approach by contacting us here.
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