What You Need to Know About Investment Policy Statements
13th Aug 2024,
Institutions, high-net-worth individuals, and family offices all need to develop one particular document that is indispensable to their financial success: an investment policy statement (IPS). This document sums up your investment goals and outlines your plan to achieve them – so what is an investment policy statement?
What Is an IPS in Investment?
An IPS is a detailed statement that describes an investor’s financial goals and investment objectives. It also lays out the roles and responsibilities of everyone involved in the portfolio’s management, including the investor, other family members, and the wealth management professional or family CFO.
When you work with us at LRVS Advisory Group, your IPS will be drawn up by your family CFO, in collaboration with you. The statement should provide a solid framework for the management of client assets, setting definite financial goals and outlining well-defined paths to achieving them. It should include specific objectives, benchmarks, and asset allocation guidelines.
The Purpose of an Investment Policy Statement at LRVS
As an investor, your IPS is your mission statement, in which you describe as completely and clearly as possible, what you plan to achieve with your investments. Your IPS sets out your general investment goals and describes the strategies that you and your family CFO are to follow to meet these objectives. It serves as a map, a set of guidelines that you can refer back to if you want to keep your investment strategies on the right track, and to guide any future investment decisions. It aligns both you and your family CFO with your primary investment objectives. It also aligns you with your family CFO, ensuring that the decisions you make are guided by an agreed set of principles and objectives.
You don’t have to worry about creating your own IPS. Your family CFO at LRVS will draw it up for you, taking all your plans and investment aspirations into account.
Elements of an Investment Policy Statement
What does an IPS consist of? In addition to your goals, your IPS should also set out your asset allocation targets, and establish a review process that will enable you and your family CFO to assess the performance of your portfolio, stay focused on long-term objectives, and adjust your strategy where necessary. The document should address the scope and time frame of the investments, as well as provisions for its management. It is important to include tax management and optimization provisions as well.
Your IPS should include monitoring and control procedures. These should stipulate the frequency of monitoring and assessment, and establish benchmarks for comparing portfolio returns with your pre-stated objectives. They should also describe pre-approved procedures for any future changes to the allocation of assets and other aspects of your portfolio. Your family CFO will help you include actionable provisions to prevent any impulsive changes to your investment strategy.
An Example of an Investment Policy Statement with LRVS
Every IPS is unique, but a typical document will generally look something like this:
Executive Summary
Dr. John Doe, Individual Investor, age 46
Portfolio Type: Individual, taxable
State: Massachusetts
Tax ID:
Current assets: $1, 500,000
Return goal: 7%
One-year loss limit: 15%
Objectives
- Capital preservation
- Long-term growth
- Ten-year time horizon
- No short-term liquidity requirements
- 7% rate of return
- Risk profile: Aggressive
Family CFO Duties
- Advise on asset allocation.
- Fiduciary responsibility to help clients maximize long-term financial returns and protect capital.
- Select assets in line with strategies agreed with the client.
- Control and report investment costs.
- Monitor all investments and manage client’s portfolio.
- Provide monthly reports on the progress of investments.
General allocation of assets:
- Equity: – U.S. only, high-dividend, small cap.
- Fixed: U.S. Bonds, corporate bonds, government bonds, high-yield bonds, real estate investment trusts (REIT).
Monitoring and Rebalancing of asset allocation
The portfolio is to be rebalanced annually while minimizing the tax consequences of asset sales. Family CFO and Dr. Doe to confer on the direction of the portfolio annually, at a minimum, to consider whether goals are being met, or whether changes are necessary. Performance and fees are to be included in this conference.
If you have been wondering about the answer to the question, “What is an investment policy statement?”, we hope this gives you an adequate overview. When you work with LRVS Advisory Group, you will receive your own IPS, drawn up according to your specific financial needs. Contact us today to discuss the possibility of working with one of our expert wealth management advisors.
*Disclaimer:
This article is provided by McAdam LLC (“McAdam” or the “Firm”) for informational purposes only. Investing involves the risk of loss and investors should be prepared to bear potential losses. Past performance may not be indicative of future results and may have been impacted by events and economic conditions that will not prevail in the future. No portion of this article is to be construed as a solicitation to buy or sell a security or the provision of personalized investment, tax, or legal advice. Certain information contained in this report is derived from sources that McAdam believes to be reliable; however, the Firm does not guarantee the accuracy or timeliness of such information and assumes no liability for any resulting damages.
This article is the sole opinion of this individual and is not indicative of the firm’s beliefs.
