Investment Policy: The Blueprint Of Your Portfolio

An Investment Policy Statement (IPS) is the key document in a relationship between an investor and an investment adviser.  The reason for this is that the IPS, constructed properly, is the link between a client’s investment objectives and how an Adviser will manage his/her client’s portfolio on a day-to-day basis.  In other words, it’s the equivalent of a blueprint that an architect would use to build a house.  Without such a blueprint, the architect doesn’t have a detailed plan to follow when constructing the house and the homeowner doesn’t have a document to hold the architect accountable for the construction of the house as agreed upon.  In the private wealth management industry today, I strongly believe that there is such broad-based dissatisfaction by investors as they do not have any blueprint, or IPS, for the management of their wealth.  As a result, their hard-earned wealth is being managed without any concrete guidelines that are clearly understood by both client and Advisor.

Most of HighView’s Investment Policy Statements for our family clients range from 15-17 pages, depending upon the complexity of each client’s situation.

An IPS has key five sections:

(1) Statement of Objectives and Risk Tolerances:

• What is the purpose of the money as well as the quantified goal and timeline? (i.e. we need to have $1 Million saved for retirement purposes in 20 years)
• Will any income be required now (later)? If so, how much?
• What is the investor’s tolerance for risk of both capital and income?
• What are the investment constraints to be considered when managing the money? (i.e. taxes, requirement for short-term liquid funds, unique preferences such as Socially Responsible Investment requirements [for example, no defense/military investments])

(2) Portfolio Construction Guidelines:

• What asset classes (i.e. Stocks, Bonds) and geographies (i.e. Canada, US, International, etc.) will the portfolio be invested in, and how much will the portfolio be allocated to each of these categories?
• How will the portfolio asset classes be rebalanced when market prices shift?

(3) Duties and Responsibilities:

• What are the client’s responsibilities in the relationship? (i.e. providing personal financial updates to adviser)
• What are the responsibilities of the adviser?
• Who will custody/hold the client’s assets to keep them safe?

(4) Portfolio Control Procedures:

• What are the performance objectives and how will they be measured?
• How will the portfolio be monitored to ensure that it continues to meet the standards of the IPS?
• How will the costs associated with managing the portfolio be monitored? (i.e. trading, custody, investment management, etc.)

(5) Investment Policy Review:

• How frequently will the investor and adviser mutually agree to review the IPS?

The IPS should be carefully designed to meet the real needs and objectives of the client.

In the book “Investment Policy”, author Charles Ellis provides five simple tests of Investment Policy Statements:

1. Is the Policy carefully designed to meet the real needs and objectives of the client?
2. Is the Policy written so clearly and explicitly that a competent stranger could manage the portfolio and conform to the client’s intentions?
3. Would the client have been able to sustain commitment of the policies during the capital markets that have actually been experienced over the past 50 – 60 years – particularly over the past 10 years – when conventional wisdom was most opposed?
4. Would the Investment Advisor have been able to maintain fidelity to the policy over the same periods — despite intense daily pressure?
5. Would the policy, if implemented, have achieved the client’s objectives?

“Sound investment policies will meet ALL of these tests.  Do yours?” – Charles Ellis