Prior to constructing a portfolio for a client, an advisor should understand the client’s goals, resources, circumstances, and constraints. Portfolio planning is the process of constructing a portfolio to meet the client’s investment objectives and the written document governing this process if the Investment Policy Statement (IPS).
The IPS is the communication of the plan between the client and the advisor 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, this 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.
Having a well-structured IPS allows the advisor to refer to this document when regarding the suitability of a particular investment. In some countries, an IPS is, in fact, a legal or regulatory requirement. The document should also be reviewed on a regular basis as client circumstances change to ensure it continues to be appropriate for the client objectives.
Which statement best describes the reasons for an Investment Policy Statement?
A. The IPS ensures there is clear communication between the client and the advisor of the client’s investment objectives.
B. The IPS allows for transparency on the fees levied by the advisor for investment work.
C. The IPS sets out which assets the advisor should buy and sell on behalf of the client.
The correct answer is A.
The Investment Policy Statement is the written document governing the portfolio planning process that ensures the client’s investment objectives and constraints are clearly communicated.
Reading 41 LOS 41a:
Describe the reasons for a written investment policy statement (IPS)