Investment Policy Statement (IPS)

An Investment Policy Statement (IPS) is a document that outlines the philosophy, goals, constraints and decision making schema for an investor, or more commonly, an investment manager managing money for the benefit of somebody else. In the case of the latter, the IPS is a team effort created on the basis of an understanding established between the investment manager and the client.

An IPS is not currently required by law for investment managers and advisors, but they are so commonplace in the industry that you could be forgiven for thinking otherwise. It is not a contract, is not enforceable, and is more of a memorandum of understanding (MOU) between the adviser and client, or a means of self-governance for individual investors than a legal agreement. In the context of the adviser-client relationship the IPS is based on the results of an investment policy questionnaire or equivalent fact-finding exercise. This allows the adviser to codify an approach to managing the client’s money that is appropriate for the individual.

Common features of an IPS:

• investment goals
• asset allocation
• restrictions
• risk tolerance
• time horizon
• rebalancing policy
• reporting and monitoring policy
• any withdrawal/liquidity requirements
• tax policy and/or tax sensitivity considerations
• disclosures

Mr. Client completes an investment policy questionnaire at the request of his wealth manager. After sending the document to his WM they have a follow-up discussion to confirm in more detail, some of the more nuanced parts. The WM follows up with the client a few days later with the newly authored IPS and reviews it with the client. The client agrees that it is in line with his goals, tolerances and hopes for his investments and duly signs the document for posterity with the understanding that they will review the document annual to ensure that it remains fit-for-purpose.

The wealth manager furnishes a copy of the document to all counter-parties providing investment management services for the client. They gain a clear understanding of Mr. Clients history and experience with various investments, his attitude to risk along with his tolerances, his reason for investing and performance expectations. The likelihood of conflict, misunderstandings and conflicts are greatly minimized. Mr. Client receives what he wants. His service providers understand what service need be provided.