When visiting a new destination, it helps to map out the directions. Upon arrival, you decide on an activity plan. If you’re going to a state park for a hike, you determine how to get there and next, which trail to follow at the park. Similar to an expedition, an Investment Policy Statement (IPS) is a guide to your financial future.

An IPS is the map, activity schedule and outcome document between a financial advisor and client. The first section of the statement includes the client’s broad investing goals and objectives. The next component discusses the path the advisor, in collaboration with the client, follows to reach the goals. The details include topics such as asset allocation, risk tolerance and financial goals. (For more, see: Profit With Investment Policy Statements.)


Take a look at the following fictitious example of an Investment Policy Statement.

Investor First Advisory, LLC Investment Policy Statement for Juan Martinez

Executive Summary:

Juan Martinez, Individual Investor, age 55

Portfolio: Individual, Taxable

State: California

Tax ID: xxx-xx-xxxx

Current Assets: $500,000

Return Goal: 6%

1-year loss limit (worst case scenario): 15-18%


Long term growth and capital preservation.

Risk profile: Conservative

Time horizon: Greater than 5 years

Short term liquidity needs: None

Performance long-term rate of return expectation: 6% (based upon historical rates of return)

Financial Advisor Duties and Responsibilities:

Fiduciary, non-biased third party charged with helping client meet long-term financial goals.

Confer with client to create asset allocation.

Select assets in accord with asset allocation providing sufficient diversification of risk and returns.

Control and report all investment costs.

Monitor all investment options and portfolio custodian.

(Custodian is responsible for safe keeping of client’s assets)

Value all portfolio holdings on regular basis.

Provide monthly reports that include securities, cash flow, income, and monthly change in value.

Portfolio Selection Guidelines:

In general, long term investment performance is determined by asset performance. Historically, stock assets offer higher rates of return along with greater volatility. Fixed assets generally yield lower rates of return, lower correlation with equities and less risk. Diversification across asset geography and size is recommended. (For more, see: Risk and Diversification: Introduction.)

Based upon the client’s conservative risk profile the portfolio asset allocation will be 60% stock assets and 40% fixed.

The individual composition of holdings will be selected from index funds and exchange traded funds from the following asset classes:



High Dividend


Small Cap

International including developed and developing markets


U.S. Bonds

Corporate Bonds

Government Bonds

High Yield Bonds

Real Estate Investment Trusts (REIT)

Global Bonds

Global REIT

Rebalancing of Asset Allocation:

According to data from Vanguard, there is no universally agreed upon asset allocation. Nor is there data to recommend rebalancing more frequently than annually. Thus, the portfolio will be rebalanced annually, while attempting to minimize the tax consequences of the asset sales.

Performance Monitoring:

Each index mutual fund or exchange traded funds’ returns will be compared with their related benchmark. Deviance from that benchmark will be evaluated and discussed annually. The holdings will also be compared with peer group funds. (For more, see: Explaining Portfolio Rebalancing to Clients.)

The parameters for selling a fund due to poor performance include 1 year of greater than 1% deviation from benchmark and/or falling in bottom 50% of cohort fund group.

Costs will be monitored annually to ensure that total costs do not surpass 1% of all investable assets.

Annually, at a minimum, overall portfolio will be monitored to consider whether initial goals are in place or have changed. Performance and fees will also be included in this conference. Together, Mr. Martinez and the advisor will determine the future portfolio direction. (For more, see: The Best Portfolio Balance.)

The Bottom Line

An investment policy statement is personal and individualized for the circumstances of the advisor’s client. The previous example is one type of IPS. Each financial advisory firm will have a version of their own statement. Finally, large investment brokerage companies also have investment policy statements for their individual mutual funds and/or client groups. The investment policy statement keeps both the client and advisor on the same investing page and holds the advisor accountable to a certain standard. (For more, see: Ethical Standards You Should Expect from Financial Advisors.)

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