Lesson 1 of 7 · 12 min
The investment policy statement: why and what
The investment policy statement (IPS) is the written plan, built from a fact-finding with the client, that records the client's objectives and constraints and governs every later portfolio decision.
In short
- Portfolio planning is the work done before any portfolio is built; its written output is the investment policy statement (IPS), the starting point of the portfolio management process.
- Reasons for a written IPS: it communicates the plan for investment success, is best practice, is the yardstick for judging whether an investment is suitable, and is sometimes required by law or regulation. It does not guarantee the objectives will be met.
- Typical sections: introduction, statement of purpose, duties and responsibilities, procedures, investment objectives, investment constraints, investment guidelines, evaluation and review, and appendices on the strategic asset allocation and rebalancing policy.
- The objectives (risk and return) and constraints (liquidity, time horizon, tax, legal/regulatory, unique circumstances) are the parts most tied to the client's distinctive needs: the 'objectives and constraints' format.
- The IPS is built after fact-finding (know your client) and must be reviewed regularly and whenever the client's circumstances change materially.
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