Skip to content
Live
Table of Contents
Financial Advisor Financial Advisor Careers
An Example of an Investment Policy Statement
By Barbara A. Friedberg
Updated May 28, 2024
Reviewed by Pamela Rodriguez
Fact checked by Suzanne Kvilhaug
businessman gestures as he asks the financial advisor a question
SDI Productions / Getty Images
What Is an Investment Policy Statement?
An investment policy statement (IPS) is a strategic document used by financial advisors to outline
guidelines that can help launch and manage a client's investment program.
It can be an important and useful tool because it lays the foundation for a client-financial advisor
relationship and provides an objective course of action. The IPS details include how the advisor will
make investment decisions. A solid IPS is a guide to your financial future.
Many financial advisors have their own version of an investment policy statement. They can then tailor
it to the specific financial and investment situations and perspectives of individual clients.
Key Takeaways
An investment policy statement is a strategic document that outlines guidelines for achieving a client's
investment goals.
It lays the foundation for the client-financial advisor relationship and details how the financial advisor
will make investment decisions.
It can serve as an objective course of action to prevent emotions from driving unwise investment
decisions.
An IPS should be tailored to each client's financial and investment situations and perspectives.
The look and style of an IPS may differ from firm to firm; some components may depend on an
individual client's needs and goals.
Components of an Investment Policy Statement
An IPS is a map, activity schedule, and outcome document between a financial advisor and a client. The
first section of the statement includes the client’s broad investing goals and objectives. The next
component discusses the path that the advisor, in collaboration with the client, follows to reach a set of
goals.
The details include topics such as asset allocation, risk tolerance, and financial goals.
Important
Clients have a role in the IPS beyond providing the information that can help tailor it to their personal
needs. They must review it and sign it to signal agreement. They should also review the IPS at least
annually and bring any concerns about it to their financial advisor's attention.
An Example of an IPS
Take a look at the following fictitious example of an investment policy statement.
Investor First Advisory, LLC Investment Policy Statement for Juan Martinez
Executive Summary:
Juan Martinez, Individual Investor, age 55
Portfolio: Individual, Taxable
State: California
Tax ID: xxx-xx-xxxx
Current Assets: $500,000
Return Goal: 6%
One-year loss limit (worst case scenario): 15% to 18%
Objectives:
Long-term growth and capital preservation
Risk profile: Conservative
Time horizon: Greater than five years
Short-term liquidity needs: None
Long-term rate of return expectation: 6% (based upon historical rates of return)
Financial Advisor Duties and Responsibilities:
Fiduciary; unbiased third party charged with helping clients meet long-term financial goals.
Confer with the client to create asset allocation.
Select assets in accordance with asset allocation providing sufficient diversification of risk and returns.
Control and report all investment costs.
Monitor all investment options and the portfolio custodian. (The custodian is responsible for the
safekeeping of the client’s assets.)
Value all portfolio holdings on a regular basis.
Provide monthly reports that include securities, cash flow, income, and the monthly change in value.
Portfolio Selection Guidelines:
In general, long-term investment performance is determined by asset performance. Historically, stock
assets offer higher rates of return along with greater volatility. Fixed-income assets generally yield lower
rates of return, have a lower correlation with equities, and have less risk. Diversification across asset
geography and size is recommended.
Based on the client’s conservative risk profile, the portfolio asset allocation will be 60% stock assets and
40% fixed.
The individual composition of holdings will be selected from index funds and exchange-traded funds
from the following asset classes:
Equity
U.S.
High-Dividend
Value
Small Cap
International, including developed and developing markets
Fixed
U.S. Bonds
Corporate Bonds
Government Bonds
High-Yield Bonds
Real Estate Investment Trusts (REIT)
Global Bonds
Global REITs
Rebalancing of Asset Allocation:
According to data from Vanguard, there is no universally agreed upon asset allocation. Neither is there
data to recommend rebalancing more frequently than annually. Thus, the portfolio will be rebalanced
annually, while attempting to minimize the tax consequences of asset sales.
Performance Monitoring:
Each index mutual fund's or exchange-traded fund's return will be compared with its related
benchmark. Any deviation from that benchmark will be evaluated and discussed annually. The holdings
will also be compared with peer group funds.
The parameters for selling a fund due to poor performance include one year of greater than 1%
deviation from the benchmark and/or falling in the bottom half of the cohort fund group.
Costs will be monitored annually to ensure that total costs do not surpass 1% of all investable assets.
The overall portfolio will be monitored annually, at a minimum, to consider whether initial goals are in
place or have changed. Performance and fees will also be included in this conference. Together, Mr.
Martinez and the advisor will determine the future portfolio direction.
What's an Investment Policy Statement?
It's an agreement between a client and a financial advisor outlining how the financial advisor will meet
the client's investment goals. It should be tailored to the client's specific financial and investment details
as well as the financial advisor's costs.
Why Is an Investment Policy Statement Important?
An investment policy statement is important because it documents the guidelines for the plan that will
implement a client's investment program. It can also prevent emotions from overtaking the investment
decision-making process in financially turbulent times.
What Should Be Included in an IPS?
The components of an IPS for a particular client should be tailored to that client's details and needs.
Generally speaking, though, an IPS may include a client summary, client objectives, financial advisor
duties and responsibilities, portfolio selection and rebalancing guidelines, performance monitoring
guidelines, and advisor costs.
The Bottom Line
An investment policy statement is personal and customized for the circumstances of the advisor’s client.
The previous example is one type of IPS. Each financial advisory firm will have its own version.
Large investment brokerage companies also have investment policy statements for their individual
mutual funds and/or client groups. The investment policy statement keeps both the client and advisor
on the same investing page and holds the advisor accountable to a certain standard.
Compete Risk Free with $100,000 in Virtual Cash
Put your trading skills to the test with our FREE Stock Simulator. Compete with thousands of
Investopedia traders and trade your way to the top! Submit trades in a virtual environment before you
start risking your own money. Practice trading strategies so that when you're ready to enter the real
market, you've had the practice you need. Try our Stock Simulator today >>
Compare Accounts
Related Articles
Two people shaking hands in an office.
Becoming a Registered Investment Advisor (RIA)
Woman standing in a flooded street.
Natural Disasters Are Becoming More Frequent—Is Your Financial Plan Ready?
Thumbnail of Dennis Moseley-Williams
Advisors: Here's Why You Should Be Rethinking the Client Experience
A woman looking stressed, sitting on a sofa.
Why Your Bonus Could Be a Great Opportunity to Prepare for the Unexpected
A smiling financial planner works with a young couple in their kitchen.
What Is a Financial Planner? Different Kinds and What They Do
Couple talking to financial advisor at home
How Do DEI Initiatives Benefit Financial Advisory Firms?
A young adult taking a test.
Series 63 vs. Series 65 vs. Series 66: What's the Difference?
What Are Financial Securities Licenses?
Savings
10 Steps to Financial Security Before Age 30
Young Couple With Financial Advisor
How Radical Transparency Can Help Independent Advisors Boost Success
Fiduciary Designations for Financial Advisors
A person holds an iPhone displaying cryptocurrency trading apps.
Cryptocurrencies in 401(k) Plans: A Guide for Plan Administrators
Business team present. Photo professional investor working new startup business project. Finance
business meeting. Digital tablet laptop computer smart phone using.
A Guide to Financial Designations
A financial advisor meeting with clients
The Growing Importance of Behavioral Finance—and How Advisors Can Increase Wallet Share
Person looking at a piece of art in a gallery.
I'm a Financial Advisor: Here Are 7 Tips for Investing in Art
Administration teamwork, people review financial data, finance funding or accounting statistics
CPA, CFA, or CFP®: Pick Your Abbreviation Wisely
TRUSTe
About Us
Terms of Service
Dictionary
Editorial Policy
Advertise
News
Privacy Policy
Contact Us
Careers
Investopedia is part of the Dotdash Meredith publishing family.
Ad
