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The Importance of an Investment Policy Statement

The Importance of an Investment Policy Statement

An Investment Policy Statement (IPS) is a crucial, client-specific document developed between you and your portfolio manager. It documents your financial objectives, constraints, unique circumstances and overall governance procedures, all of which are to be applied to the investment related activities carried out on your behalf by your portfolio manager.

Why is an Investment Policy Statement Important?

Your Investment Policy Statement is central to the planning and implementation of your investment mandate. Developing the IPS embodies key elements of investment planning: you and your portfolio manager work together to consider your current financial circumstances, agree on your long-term goals, establish strategies to attain those goals, set parameters and restrictions around the strategies and plan the regular monitoring and review of results.

Most of the information that appears in your IPS is derived from your answers on your Know Your Client (KYC) Form. The IPS becomes a signed agreement between you and your portfolio manager that outlines the mutually agreed upon rules with which the portfolio manager must abide.

What are the Benefits of an Investment Policy Statement?

  • The IPS ensures that you and your portfolio manager are in agreement as to how your investments will be managed.
  • The IPS documents that your assets are invested in conjunction with your overall financial plan.
  • All investors are different, therefore the IPS is tailored to your unique criteria and financial circumstances largely based on your answers from completing your KYC Form.
  • A documented investment process protects you from short-term arbitrary or emotional decisions based on external influences.
  • The inclusive process of creating an IPS educates you about the investment process while enabling the portfolio manager to become more familiar with you beyond KYC regulations.

What to Look For in an Investment Policy Statement

The Investment Policy Statement outlines the duties of all parties involved. This could just be you and your portfolio manager, or it could also include one or more of your trusted advisors. In the case of a family office, it can include multiple members of the family office including tax accountants, lawyers, investment consultants etc. In the instance of a Trust or Foundation, it can include a formalized investment committee or investment board.

The IPS states your investment objective(s) and goal(s) which are key to establishing an appropriate investment strategy. It details and defines the investment process and security parameters employed by the portfolio manager and specifies guidelines for specific security and sector weightings. If you have any unique requests that would affect the portfolio manager’s fully discretionary investment process, such as avoiding investments in companies that produce tobacco products, these will also be outlined in the IPS.

Having an Investment Policy Statement is Key to Meeting Your Goals

Working together with your portfolio manager is crucial to developing a personalized Investment Policy Statement. The IPS is the first step to helping you maintain a long-term investment focus during shorter-term market volatility. A well-constructed IPS will greatly increase the probability of achieving your investment objectives.

This content is provided for general informational purposes only and does not constitute financial, investment, tax, legal or accounting advice nor does it constitute an offer or solicitation to buy or sell any securities referred to. Individual circumstances and current events are critical to sound investment planning; anyone wishing to act on this content should consult with his or her financial partner or advisor.

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