The Investment Policy Statement, or IPS, is possibly the most important tool in the Investor/Advisor relationship. The IPS is a highly customized personal strategic document for the planning and implementation of an investment program. It serves as a communication and governance medium between investor and advisor for making financial decisions as the investment environment and personal circumstances change. Most importantly the IPS serves as a buffer; its consistent longer-term outlook balances the overload of information we take in about short-term economic volatility. In other words, the IPS assists us in mitigating panic and prevents us from making knee-jerk decisions.
By definition, an investor’s IPS must be quite specific to that investor’s particular needs and wants. In order to prepare an accurate IPS, the advisor gathers information from questionnaires, account and income statements, and interviews with the investor. For example, each new investor is given an ‘Investment Preferences Questionnaire’ that asks questions about the investor’s investment style and risk tolerance, as well as financial goals and current and future needs. Some of the questions we ask are real-life kind of ‘What would you do…?’ scenarios about investing. These are particularly important because people (whether they are new to investing or not) often perceive their risk tolerance as higher or lower than it actually is, and the questionnaire brings this discrepancy to light and allows the investor and advisor to agree on an appropriate long-term strategy.
The IPS is typically includes a rundown of an investor’s investment objectives, strategic philosophy and both the advisor and the investor’s responsibilities. It also summarizes how the portfolio will be diversified (in a big-picture way), and what the goals are for each asset category. The IPS is signed by both the advisor and the investor, and is typically reviewed at least annually.