Investment Policy Statement

Investment Policy Statement

An Investment Policy Statement ("IPS") is a document, generally between an investor and the assisting investment manager, recording the agreements the two parties come to with regards to issues relating to how the investor's money is to be managed. In other cases, an IPS may also be created by an investment committee (e.g., those charged with making investment decisions for an endowment or pension plan) to help establish and record its own policies in order to assist in future decision-making or to help maintain consistency of its policies by future committee members or to clarify expectations for prospective money managers who may be hired by the committee.

The presence of an IPS helps to clearly communicate to all relevant parties the procedures, investment philosophy, guidelines and constraints to be adhered to by the parties. It can be seen as a directive from the client to the investment manager about how the money is to be managed, but at the same time the IPS should provide the guidelines for all investment decisions and responsibilities of each party. As a policy document rather than an implementation directive, the IPS should provide guidance for how investment decisions will be made; it should not be a list of the specific securities to be used.

When the investor is an individual client, as a general rule, the investment manager (or financial advisor) has the responsibility of creating the document, since the manager is generally more familiar with its purpose and normal content. Both the manager and the client generally sign the document, indicating acknowledgment of and agreement to its several parts. This can serve to protect both parties in the event of a future disagreement, as long as they have respectively adhered to the content of the IPS. A properly written investment policy statement can be critical in minimizing the legal liability of those serving in a fiduciary capacity (e.g., qualified plan trustees and trustees of irrevocable trusts, endowments, foundations and charitable trusts).

Today, use of an IPS with each investment client is now considered a best practice for investment managers and should be expected by clients hiring a professional investment manager.

The presence of an IPS helps to create an environment of transparency in the relationship between client and advisor. The IPS offers clients a better understanding of what to expect from their advisor. That clarity generally helps to build a much higher level of trust and respect and it helps ensure the investment manager is aware of the expectations of the client.