The Investment Policy Statement is a written expression of the client's objectives of risk and return along with any constraints in their implementation. The document governs all investment decisions for the client, outlining the responsibilities of the client and planner alike and provides a means for evaluating investment performance. While all investment policy statements share these basic features, they will differ in constraints both by client type and within client type. That is to say, an investment policy statement prepared for an institutional client will differ in its risk and return objectives and its constraints from an individual client. Within the institutional client types, there are difference policy considerations that hold for life insurance companies v. property and casualty companies v. eleemosynary institutions v. pension funds v. defined contribution plans. Within the individual investor types, different considerations hold for super high net worth individuals/families v. high net worth individuals/families v. mass affluent individuals/families v. middle income individuals/families v. individuals investing for the very first time and new to the workforce.
Investment policy construction is the basis for planning and suitability. Planners should demonstrate knowledge of its elements thoroughly.
|Return Requirements||Needs to be consistent with the investor\'s risk tolerance and the portfolio\'s ability to generate returns.|
|Risk Tolerance||The investor\'s willingness and ability to accept risk. The latter refers to the portfolio\'s ability to bear risk and yet attain the desired outcome. The former assesses the investor\'s attitude towards risk.|
|Time Horizon||May be categorized as short-, intermediate- or long-term; single stage or multistage. Time Horizon is correlated with risk. A short time horizon will impede an investor from accepting as much risk as if s/he were to have a longer time horizon.|
|Liquidity||The ease with which assets can be converted into cash with minimal price disruption. Liquidity needs are ongoing expense and emergency reserves.|
|Taxes||Tax-driven portfolio strategy drives tax deferral, avoidance and reduction. Income, gains, wealth transfer and property are considerations in managing a portfolio\'s tax liability.|
|Regulatory||The environment is specific to the type of portfolio being managed for the client.|
|Unique Circumstances||The IPS should capture any unique preferences. Socially responsible investing and trading restrictions are examples.|
Appropriate Benchmarks and Probability Analysis
Financial AdvisorLearn how to discuss financial constraints with clients, including time horizon, tax and regulatory constraints, as well as basic risk management.
Financial AdvisorDetermining a client’s risk tolerance is a critical piece of the puzzle in designing and appropriate asset allocation.
InvestingKnowing what to expect when managing your assets will help you achieve your financial goals.
Financial AdvisorYou can't control how they react to the market, but you can help them understand the reality of the situation.
Managing WealthInvestment managers should always act to benefit the client. Learn what actions managers should take on a client's behalf.
Financial AdvisorManagers, in developing their investment process, need to determine some “general rules” that make it meaningful. We offer six.
Personal FinanceDiscover the duties and responsibilities of a portfolio manager, along with education, training and skills requirements, and salary expectations.
Financial AdvisorA retirement policy statement can be a good idea for clients. Here's how to create one.
Financial AdvisorWant to keep clients longer? Bolster your risk assessment capabilities.
Financial AdvisorLearn the five things an advisor should know before investing another person's money, with a focus on the FINRA "know your customer" rule.