What Is an Investment Policy Statement (IPS)?

An investment policy st🔜atement (IPS) is essentially a business plan for an investment portfolio. Financial advisors often create them for their institutional clients, such as retirement plan sponsors, f🔜oundations, and endowments, and may also draft them for their individual clients.

An IPS makes it easier to avoid panic selling and provides discipline to the portfolio strategy. By following a preset, written game plan, these investors can put their emotions aside and follow the rules in place since short-term volatility is often less important than long-term gains.

How an IPS Works

An IPS details a road map for how clients should invest their money. What asset clas💫ses should be considered? What types of investments should be considered? These might include exchange-traded funds (ETFs), mutual funds, and other vehicles.

In addition, an IPS details how assets will be allocated for the portfolio. The 澳洲幸运5官方开奖结果体彩网:asset allocation should take into account the investor’s time horizon and their 澳洲幸运5官方开奖结果体彩网:risk tolerance. 𝓰There should also be criteria for selecting new investm🌳ents and replacing them.

Below are the different cꦕomponents typically included in an IPS

Along with specifying the investor's goals, priorities, and investment preferences, a well-conceived IPS details when a systematic portfolio review will occur. This enables investors to stay focused on their long-term objectives, even as the market moves in the short term. It should contain all current account information, allocations, how much the investments have appreciated, and how much is being invested in the different accounts.

For a specific illustration of an IPS, see our "澳洲幸运5官方开奖结果体彩网:An Example🍬 of 💜an Investment Policy Statement."

IPS for an Individual Client

An IPSꦦ for an individual client should be an extension of their financial plan. This should reflect their reasons for investing, such as saving for college or retirement, as well as their time horizon, risk tolerance, and the l🐼evel of returns needed to match those goals. These criteria will lead to the target asset allocation and the types of investments.

Generally, the target allocation will include a range of values for each type of asset. For example, 澳洲幸运5官方开奖结果体彩网:large-cap stocks might have a target allocation of 20% with an acceptable range of 15% to 25%. If the actual percentage of large-cap stocks moves outside that range, the 澳洲幸运5官方开奖结果体彩网:financial advisor might rebalance the portfolio.

The IPS should also include criteria for selecting, monitoring, and replacing difౠferent investments. These might consist of performance relative to their peer group, costs, changes in management (fo๊r ETFs and funds), and other relevant criteria. Financial advisors and clients should also agree on a benchmark metric for tracking the portfolio’s returns.

An IPS for a 401(k) Plan

Drafting an IPS is one of the first things an advisor will do for a 401(k) plan sponsor. If a plan already has an IPS, the advisor should review this document and ⛦make revisions (or start from scratch) as needed.

The IPS should state the plan's purpose and the types of investments it can include, such as mutual funds, 澳洲幸运5官方开奖结果体彩网:collective trusts, stable value funds, and managed accounts like target-♌date funds.

The overriding reason a 401(k) plan sponsor needs an IPS is fiduciary protection. The IPS should document the procedures the plan sponsor and advisor will follow when managing the plan's investments. When the investment committee meets, it should report what transpired and how its decisions reflect the IPS.

The IPS should also detail how often the 澳洲幸运5官方开奖结果体彩网:investment committee will meet to review the plan and who the plan’s service provide✅rs are. It should indicate that these service providers are reviewed periodically. The IPS should also specify the cr🥃iteria that will be used to select, monitor, and replace the investments in the plan.

An IPS for a Pensions, Endo🐼wments, or Foundation

Endowments and charitable foundations use their investment portfolio to fund their operations, while pension funds invest to provide higher savings for their beneficiaries. These institutions🎃 need an IPS similar to 401(k) plans, which lists all ﷽service providers and plan information.

An IPS for these institutions should set out the criteria for selecting, monitoring, and replacing the plan's investments, as well as allocations for the different assets and the target rate of return. The target level for annual withdrawals should also be indicated for endowments and foundations.

In some cases, the plan will restrict the types of investments allowed. For example, an environmental organization's IPS might exclude specific industries that amplify climate change.

As w🐽ith other plans, an institutional IPS should set out criteria for monitoring returns based on a prearranged benchmark. This provides𓃲 fiduciary protection for pension plan sponsors and the investment committees of endowments, foundations, and other nonprofits.

The Bottom Line

An IPS is a strategic document created by financial advisors to establish guidelines for launching and managing a client's investment program. It is essential because it's the basis for the client-advisor relationship and details a clear road map for investment decisions. By detailing the investment strategy and decision-making process, the IPS acts as a guide to the client’s financial future. IPSs are used with retail investors and with major institutions, funds, and other entities with massive portfolios.

Financial advisors often use their own versions, which they customize to align with individual clients' financial goals, risk tolerance, and investment perspectives. This tailored approach ensures the IPS is relevant and specific to each client’s situation, fostering a disciplined and effective investment strategy.