In its simplest terms, an investment policy statement (IPS) is a list of rules drawn up between you and your financial planner to set clear and concrete goals for each other. It also works as a game plan for the financial planner so that they can employ their expertise in the best way they see fit to meet your goals in a timely and efficient manner.
Specifically, a financial advisor would look at risk, liquidity and asset allocation. An IPS serves as a manual of sorts to manage these three components but can include additional items as well.
All financial advisors should incorporate an investment policy statement when working with a client. It’s a blueprint to reference every time you’re looking to make a decision with your money without taking emotion into the equation.
A good IPS will contain very well thought out and measured decisions. One of the main points of why an investment policy statement exists is so you don’t make any drastic decisions regardless of what your emotions are telling you. An IPS is there to make sure you have a plan so you don’t end up hurting yourself, financially speaking, in the long term.
So now that we’ve established that an IPS is a blueprint for your financial decision making, it’s important to know that it’s also there as a foundation for your long term financial goals and serves as a starting and ending reference point for your personal financial information.
Your investment policy statement should include all account information, the current allocation of your funds, the amount of income you’ve made and then how much of your money is going towards specific investments.
Furthermore, your investment goals should be clearly stated, alongside a timeframe in which you want these goals to be met. An IPS is both a description of your assets now and a wishlist for where you’d like to be.
An IPS shouldn’t look like something that’s drawn up just for the sake of being drawn up. Signs of a poorly designed investment policy statement can include:
In essence, a poorly created IPS is something that’s pretty much useless and might even do more harm than good. It’s also not a good sign if you’re not on the same page as your financial advisor, particularly in regard to having clear set goals.
An IPS should be a collaborative effort. No one person should be doing all the work, and everyone should be on the same level of understanding. If you can’t look at your investment policy statement and fully understand your goals and how you are going to achieve them, then it probably makes sense to find another financial advisor who you can better align with.
A good IPS is like a how-to guide when building a Lego set for a 7-year-old. It should be clear, concise and easy to follow.
It will serve as a tool to keep you focused on your financial goals and help you to not to get caught up in the day-to-day swings of the market. It will help you stay on track towards your long term goals, regardless of what’s happening in the short-term.
A good investment policy statement is a strong foundation when stormy conditions arise so you won’t deviate, as tempting as it might be when your emotions are telling you to do something that’s not in your statement.
A good IPS should hold both you and your financial advisor accountable for what you’ve set forth. It should have procedural steps that everyone should follow in the investment process. This includes the frequency in which you monitor your accounts and it will specify benchmarks and goals to be met over time.
Now that you know what an investment policy statement is and, most importantly, what makes up a good one, let’s now take a look at an example.
Just click here to download an example so you have a better idea of what one looks like as opposed to me just telling you in theory.
To wrap everything up, here are some bullet points that you can take away about an IPS:
An investment policy statement is the end product of a well-measured and thoughtful process drawn together by a collaborative effort. The best IPS is one where you don’t feel chained to a rulebook, yet at the same time, you can still turn to your IPS in times where you might not know the best course of action.
Have a conversation with your financial advisor to ensure you have the right investment policy statement in place for your current financial situation. If you want to take control of your financial future and have a plan for your goals, then you should consider an IPS as a foundational element in your investing process.
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NextGen Wealth, LLC is a registered Investment Advisor. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities product, service, or investment strategy. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial advisor, tax professional, or attorney before implementing any strategy or recommendation discussed herein.
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