• Tuesday, July 16, 2024
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Effective approaches to maintaining an investment policy statement

Effective approaches to maintaining an investment policy statement

For institutional investors, high-net-worth individuals, and family offices, establishing an investment policy statement (IPS) that reflects their goals and objectives is increasingly essential for long-term investment success. Despite the three recessions and significant market downturns in the last two decades, organisations like foundations, endowments, pensions, and family offices are setting higher standards for their advisors. A comprehensive and well-crafted IPS plays a pivotal role in meeting these expectations and fostering productive client-advisor relationships.

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What is an investment policy statement?

An investment policy statement describes a client’s financial goals and investment objectives while defining the roles and responsibilities of all parties involved in managing portfolios—wealth advisor, trustee, custodian, and investment manager(s). Developed collaboratively by the wealth advisor with their client, the IPS provides a structured framework for managing client assets, ensuring alignment with financial targets. It includes specific goals, benchmarks, asset allocation guidelines, and any restrictions related to securities or sectors. Moreover, it articulates fundamental intentions that support the client’s mission. The process of crafting an IPS also allows the wealth advisor to establish and manage expectations regarding market outlooks and their impact on the client’s short-term and long-term investment goals. Once created, an IPS can help contextualise the client’s spending outlook.

The IPS serves as a comprehensive document that provides a roadmap for the client’s investment strategy. It helps to clarify the client’s financial situation, risk tolerance, and investment preferences. By having a clear set of guidelines and objectives, the IPS ensures that all investment decisions are made with the client’s best interests in mind. This structured approach helps to avoid impulsive decisions that may arise from market volatility or emotional responses.

A living document

The investment policy statement acts as the central point of reference between the client and the wealth advisor through each stage of the ongoing investment lifecycle. While certain aspects like the setup and structure are static and foundational, the key components of the IPS—such as client discovery, asset allocation, portfolio construction, and governance—should be dynamic.

This means that both the client and the wealth advisor should have an understanding that certain aspects of the statement will evolve over time, given changing market environments and expectations as well as shifting client needs and constraints. These shifts may include changes in the client’s cash flows and spending policies.

For example, a client may come to the wealth advisor with what they think are achievable goals. But the wealth advisor may find and help the client realise that to attain those goals, certain criteria—such as investment objectives, asset allocation guidelines, benchmarking, and manager selection guidelines—may require adjustments.

The dynamic nature of an IPS allows it to adapt to significant life events or changes in financial status. Whether it’s the birth of a child, a career change, or an unexpected financial windfall, the IPS should be flexible enough to incorporate these changes. This adaptability ensures that the investment strategy remains aligned with the client’s evolving life circumstances and financial goals.

While the IPS is a living document, investment policies and guidelines should not change frequently. For example, short-term changes in the markets should not require an adjustment to the document. Instead, the IPS should be reviewed periodically, typically annually, to ensure it remains relevant and effective. This periodic review provides an opportunity for the wealth advisor and the client to reassess goals, evaluate performance, and make any necessary adjustments to the investment strategy.

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Build a strong foundation

By laying out the various responsibilities of each entity with fiduciary responsibilities, the IPS establishes clear guidelines for a client’s risk-taking comfort zone and ensures that objectives are realistic. As the foundation for the relationship between a client and its wealth advisor and other fiduciaries, an IPS is increasingly critical for ongoing peace of mind for clients in an environment of heightened market complexity.

The IPS helps to manage expectations and reduce uncertainty by providing a clear framework for decision-making. It outlines the processes for selecting investments, monitoring performance, and making adjustments as needed. This structured approach helps to build trust and confidence between the client and the wealth advisor, fostering a long-term, collaborative relationship.

Furthermore, the IPS can serve as a valuable educational tool for clients. It helps to demystify the investment process and provides clients with a better understanding of the factors that influence investment performance. By engaging clients in the development and review of the IPS, wealth advisors can help clients become more informed and confident investors.

In summary, an investment policy statement is a vital document for institutional investors, high-net-worth individuals, and family offices. It provides a structured framework for managing client assets, ensuring alignment with financial goals, and fostering productive client-advisor relationships. By being both comprehensive and adaptable, an IPS helps to navigate the complexities of the investment landscape and supports long-term investment success. In an era of increasing market complexity and heightened expectations, a well-crafted IPS is essential for achieving and maintaining financial stability and growth.