An Investment Policy Statement (IPS) is a formal document outlining investment goals, strategies, risk tolerance, and governance parameters that guide portfolio management decisions.
An Investment Policy Statement (IPS) is a foundational document that defines the objectives and guidelines for managing an investment portfolio. It sets clear parameters on acceptable assets, risk levels, performance benchmarks, and time horizons, serving as a roadmap for investors and advisors to ensure consistent, disciplined investment decisions. In finance and wealth management, the IPS helps align investment activities with the broader financial goals of clients or entities.
Having a well-crafted IPS is critical for ensuring accountability and clarity in investment management, especially when multiple stakeholders or advisors are involved. It facilitates disciplined decision-making by providing a reference point during volatile markets or when rebalancing investment allocations. The IPS also aids in tax-efficient structuring and reporting by clarifying which strategies align with tax planning goals. Furthermore, it supports governance by documenting roles, responsibilities, and approval mechanisms in portfolio management, ultimately protecting investor interests and maintaining alignment with risk tolerance and return expectations.
A family office establishes an IPS that specifies a target asset allocation of 60% equities and 40% fixed income, with a risk tolerance described as moderate. The IPS also sets a performance benchmark tied to a blended index and details liquidity requirements and tax objectives. During annual reviews, the investment team measures portfolio adherence to the IPS and adjusts holdings accordingly, ensuring consistent alignment with the documented goals.
Investment Policy Statement vs Investment Strategy
While an Investment Policy Statement (IPS) provides the formal written framework outlining objectives, constraints, and governance for an investment portfolio, Investment Strategy refers specifically to the approaches and asset allocation choices made to achieve these objectives. The IPS guides and documents the overall principles, whereas Investment Strategy focuses on tactical or strategic decisions aligned with those principles.
What key elements should be included in an Investment Policy Statement?
An IPS typically includes investment objectives, risk tolerance, asset allocation guidelines, liquidity needs, performance benchmarks, rebalancing policies, and governance structure including roles and responsibilities.
How often should an Investment Policy Statement be reviewed or updated?
It is advisable to review the IPS at least annually or whenever there are significant changes in market conditions, investor goals, risk tolerance, or family circumstances to ensure ongoing relevance and alignment.
Who is responsible for creating and enforcing the Investment Policy Statement?
The IPS is usually developed collaboratively by investors, family office executives, and investment advisors. Enforcement and adherence are overseen by an investment committee or fiduciary responsible for governance and monitoring.
