Your Investment Policy Statement

Investment Policy Best Practices

An Investment Policy Statement (IPS) is a written document that describes the strategy for an investment portfolio. Investors should have an Investment Policy to define their objectives, risk tolerance, time horizon, and liquidity requirements. Without a written IPS, investors are more likely to “blow in the wind” and make ad-hoc decisions without consistency. They are also more vulnerable to investing in assets that are not in their own interest. The best Investment Policies also describe the values underlying an investment philosophy. This includes support for environmental sustainability and the promotion of specific social values.

What an Investment Policy Statement does

An IPS will define your investment objectives. It will answer the question, “what is the purpose of investing?” by describing why you make certain investments. This might seem like a curious question for the average investor to answer. But consider investors with more material resources and money than they can possibly (or should) consume personally. In these cases, in addition to financial objectives, deeper, more important reasons to invest other than profits should be identified. Often times, the investment objectives for ultra high net worth investors include support for environmental sustainability, and social objectives such as support for gender equity, and specific goals about living in an equitable and/or free and democratic society.

A well-crafted Investment Policy helps professionals like investment managers, accountants, lawyers, and bankers provide advice by explaining the client’s objectives. A written IPS also helps bring family members onto the same page. So, if/when you discuss investment strategies and make decisions as a family, those with a stake in the outcome can provide more productive input because objectives have been clearly defined.

Frequently, investors without a written Investment Policy are more prone to making ad-hoc decisions and their returns suffer. They tend to “wing-it” and “shoot from the hip”. Consequently, investors without a written IPS are more vulnerable to fraud, misleadingly high fees, and potential conflicts of interest. Alternatively, a written Investment Policy provides a framework to guide investment decisions and evaluate the outcomes. Therefore, it helps the investor choose the best investments and the best investment managers.

Define Your Values

The first step in drafting an IPS is also the most difficult. Defining the investment values and investment objectives is done through a discovery process. This process usually consists of discussions with the investor(s) but could also involve other information gathering methods such as questionnaires. Drafting an investment policy for a multi-generational family might include an advisor canvassing multiple family members, even if parents or grandparents are the ones making the ultimate decisions.

Once investment objectives are defined, the guts of the Investment Policy can be written. The major sections will be:

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

Other major items to cover with an Investment Policy are defining the investor’s risk tolerance, time horizon, and target rate of return.

Using an Investment Policy

Once investors have a drafted Investment Policy, they need to share it with their advisors. This is especially true with their investment advisors. Typically, ultra high net worth investors will have more than one investment manager, and most times different investment managers will look after investments from specific asset classes such as a fixed income manager and an equities manager. Each investment advisor should understand how they contribute to the investor’s overall objectives, so the advisor can give appropriate advice.

Other advisors such as the investor’s accountant, lawyer, and banker can also benefit from understanding their client’s investment objectives. For example, when crafting or reviewing estate plans, accountants and lawyers can give better advice when they understand the client’s investment objectives. It might also make the job of estate planners easier if they don’t need to re-discover values and objectives that have already been listed in the client’s Investment Policy.

One of the main benefits to having a written Investment Policy is that it can define performance reporting and evaluation criteria. This gives the investor a basis to evaluate the outcomes of their investment manager(s) and individual investments compared to benchmarks. This is important because it is often difficult for investors to tell the difference between real performance (“alpha”) and the “tide lifting all boats” when receiving performance reports from their investment managers.

Our Approach

At Markdale, we provide family office services to wealthy families. We help investors define their objectives and craft custom Investment Policy Statements. The Investment Policies we create for our clients typically consider ESG issues such as environmental sustainability. We have experience with a variety of investors such as several ultra high net worth investors with more than $100 million in assets as well as charitable foundations with institutional mandates. We invite you to learn more about how we draft Investment Policy Statements, please feel free to be in touch with us by following this link and sending us a message. Click here to download and view the Investment Policy Statement for the George Brown Memorial Foundation which is the private foundation of James Dunne.

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