The Importance of an Investment Policy Statement (IPS)

This web presentation discusses the importance of an Investment Policy Statement (IPS) when managing client portfolios.

The following is a transcript of this web presentation:

At Beacon as we partner with you to manage your portfolio, we believe it is important to have an investment policy statement or IPS.  The purpose of this important document is to establish a foundational framework that identifies how we, as your investment advisor, will manage your portfolio.  In essence, this document verifies that we are on the same page and you have a solid understanding of how your portfolio is invested.

So what are the essential elements in an Investment Policy Statement?

Now because an investment policy statement is a very customized document specific to you, there is quite a bit of input and discovery that must take place in order to be in a position to create an investment policy statement. 

Often times going through the financial planning process helps us identify all of the moving parts and we like to list those key elements in an Investment Policy Statement.  You will find things like:

• Your Financial Background

• Investment Objective or Goals

• Current and Future Income Needs

We also document our understanding of your risk profile which includes how much risk you need to take, how much risk you can afford to take and your behavioral and emotional attitude towards risk

We also like to mention any client-specific constraints that are a factor.  This can be things like legacy positions you would like to retain or any tax considerations that impact your investment strategy.

After we have identified the personal components that impact your investment strategy the Investment Policy Statement specifically outlines the stock/bond mix – or Asset allocation that we believe is appropriate for you. 

This section is important because a portfolio’s allocation to stocks, bonds and cash really drive both the risk and returns in your portfolio.  In other words, we would expect over the long term that portfolios with more stock exposure will attain higher returns and experience greater day to day volatility than a portfolio with higher bond and cash exposure.

You will find this information in the “Allocation Parameters Table” of your IPS.  In this table you will see the current or recommended target allocation, as well as an allocation range for each asset class.

For example, we may recommend that overall your portfolio should be invested 60% to stocks and 40% to bonds – that would be our current target allocation.  However, we may have an allocation range of 45% to 65% stocks and 35% to 55% to bonds.

The allocation range sets boundaries or guard rails on how your portfolio is invested. While we do not expect your overall investment objective to change substantially in the short term, we do recognize that the financial markets and the economy evolves.  Therefore, we do need to have some investment flexibility when managing your portfolio. 

One question we receive is when do we need to update your Investment Policy Statement?

While we review every client’s IPS on at least an annual basis, we have found that there are certain triggering factors that warrant an IPS update.  Those include:

• When your personal circumstances change

• When your risk profile changes

• During a period of transition, or expected transition

Remember, we are partnering with you to help manage your portfolio.  We want you to understand the investments you own and most importantly the rationale of why your portfolio is structured the way it is.  An investment policy statement is an effective document in accomplishing that goal.