How to create a client investment policy statement

The recent stock market volatility once again shows that investors should not react and make investment decisions because of panic, but have a plan and investment strategy that takes into account market adjustments. The 2008-09 financial crisis proved the benefits of this approach. Sadly, many investors sold their stock positions at or near the bottom of the market, recorded losses, and then missed part or all of the subsequent bull market that began in March 2009. Fear is their guide, not a plan.

The Investment Policy Statement (IPS) is essentially the business plan of your investment portfolio. It is common for financial advisors to set up an advisor for their institutional clients (such as retirement plan sponsors, foundations, and endowment funds). Many financial advisors will also draft a copy for their individual clients.

Key points

  • The Investment Policy Statement (IPS) is a formal document drafted between a portfolio manager or financial adviser and a client, outlining the manager’s general rules.
  • The statement provides the client’s general investment goals and objectives, and describes the strategies that managers should employ to achieve these goals.
  • Specific information on matters such as asset allocation, risk tolerance and liquidity requirements are included in the investment policy statement.
  • The scope and content of IPS will vary according to the type of customer or investor involved-from individuals to retirement plans to charitable donations.

The role of investment policy statements

Essentially, IPS provides a roadmap for how customers should invest. Which asset classes should be considered? What types of investment vehicles should be considered? These may include exchange-traded funds (ETFs), mutual funds, and other instruments. In addition, IPS will establish a target asset allocation for the investment portfolio. It will take into account the investor’s funding time frame and its risk tolerance. There should be criteria for selecting investments to be included in the portfolio and criteria for replacement investments.

In addition to clarifying investors’ goals, priorities, and investment preferences, the well-conceived IPS has also established a systematic review process to enable investors to focus on long-term goals, even in the event of short-term market volatility. It should contain all current account information, current distribution, how much has been accumulated, and how much is currently invested in each account.

personal account

The IPS of individual customers should be an extension of their financial plan. The reasons for their investment portfolio should be reflected, such as saving for college and retirement, and should reflect the client’s goals in terms of time frame, as well as the target level of return required to achieve these goals, their risk tolerance and the savings already made for these goals Amount. This will lead to the establishment of the target asset allocation and the types of investment vehicles to be used.

Usually, the target allocation will include a range. For example, the target allocation for large-cap stocks may be 20%, and the acceptable range is 15% to 25%. In other words, if the actual percentage of large-cap stocks is within this range, there is no need to rebalance that part of the portfolio. The criteria for selecting, monitoring and replacing investment tools should be outlined. These may include performance relative to its peer group, costs, management changes (ETF and funds) and other relevant standards. These standards should be the basis for periodic portfolio reviews with clients. There should be a benchmark that enables clients and financial advisors to track the return of the investment portfolio.

401(k) plan

In the context of the 401(k) plan, IPS serves similar but slightly different purposes. Financial advisors working with the sponsor of the 401(k) plan should first draft an IPS for the plan. The existing plan may have an IPS, if so, the consultant should review this document and revise it as needed (or start from scratch). The primary reason that 401(k) plan sponsors need IPS is for trust protection. The IPS should document an investment process and be followed by the sponsor and its financial advisor to manage the plan. Regular investment committee meetings should record what happened and how the decisions made reflect the IPS process. In light of recent 401(k) court cases, this is more important than ever.

The IPS should state the purpose of the plan, which will be consistent with providing retirement savings tools for the employees of the organization. The type of investment vehicle that will be used should be outlined. These may include mutual funds, collective trusts, stable value funds, and managed accounts, such as target date funds or risk-based options. It should also specify the asset class to be provided.

IPS should discuss how often the investment committee meets to review the plan and who the planned service provider is. It should indicate that these service providers will be reviewed regularly. The IPS should also specify the criteria that will be used to select, monitor, and replace the investment options used in the plan. These may include the relative performance of mutual funds compared to their peers, changes in fund management, significant increases or decreases in assets under management, or changes in fund investment styles. Investment costs should also be considered as a major factor.

Although it sounds like a 401(k) IPS is for the benefit of plan sponsors and reduce their fiduciary responsibilities, a 401(k) plan that follows a well-designed IPS will always provide plan participants with better retirement savings tools. IPS.

Pensions, endowments and foundations

The IPS of a pension, foundation or endowment fund is similar in some respects to the IPS of an individual client. In other respects, it is like an IPS for a 401(k) plan because all service providers and plan information should be listed. There is usually only one portfolio, and that portfolio will have a goal. In the case of an endowment fund or foundation, it may fund all or part of the operation of an educational institution or non-profit organization. In the case of pensions, the goal is to provide benefits for the beneficiaries of the pension plan and meet actuarial funding requirements.

There will be standards for investment parts, monitoring and replacement. Should include target asset allocation and target rate of return. For endowments and foundations, there should be language about the target level of annual withdrawals. In some cases, restrictions on investable areas may be listed. For example, Catholic organizations may wish to avoid investing in companies that sell contraceptive products.

There is a need for monitoring standards for investment and portfolio returns based on agreed benchmarks. The IPS and the investment process outlined provide a degree of trust protection for pension plan sponsors and investment committees of endowment funds, foundations, and other non-profit organizations.

Bottom line

The investment policy statement is an excellent tool for financial advisors to create a roadmap, game plan (if you wish) to manage a client’s investment portfolio. Although the format may be slightly different, IPS is also suitable for individual customers, 401(k) plan sponsors, and other institutional customers, such as pension plans, foundations, and endowments.


READ ALSO:   Four professional associations that financial advisors should join
Share your love