The Investment Policy Statement

Before constructing a client’s portfolio, an advisor should understand the client’s goals, resources, circumstances, and constraints. Portfolio planning is the process of constructing a portfolio to meet a client’s investment objectives. The written document governing this process is the Investment Policy Statement (IPS).

The IPS

The IPS is the communication between a client and their advisor that outlines the plan for achieving investment success. Prior to formulating the IPS, the advisor will work with the client to articulate the client’s risk tolerance and specific circumstances. Typical constraints center on liquidity requirements, time horizons, regulatory requirements, tax status, and other unique needs.

In the case of institutional clients, IPS formulation may involve asset-liability management studies, identification of liquidity requirements and a range of tax and legal matters, or governance arrangements in the case of an endowment or pension plan. It may also set out the institution’s approach to corporate governance and how shareholder voting will be approached and conducted.

A well-structured IPS is a document that the advisor refers to when exploring the feasibility of a particular investment. In some countries, an IPS is, in fact, a legal or regulatory requirement. The document should also be reviewed regularly to keep it in tune with client-based dynamics. This way, it will maintain its relevance and continue to be appropriate for the client’s objectives.

Question

Which statement best describes the reasons for an Investment Policy Statement?

A. The IPS ensures there is clear communication between the client and their advisor in regard to the client’s investment objectives.

B. The IPS allows for transparency on the fees levied by the advisor for investment work.

C. The IPS spells out the assets the advisor should buy and sell on behalf of the client.

Solution

The correct answer is A.

The Investment Policy Statement is the written document governing the portfolio planning process. It ensures the client’s investment objectives and constraints are clearly communicated.