An Investment Policy Statement is a written document that outlines important issues such as goals, policies and procedures as agreed to by both advisor and client. It’s purpose is managing investments and cash flow in order to fund a retirment income plan. An Investment Policy Statement is required when a fiduciary relationship exists, and is regularly cited as a best practice in modern wealth management.
The typical investor often makes inappropriate decisions due to a lack of information and a nonsystematic approach. Emotional or behavioral factors can also lead to improper decision-making. By using an Investment Policy Statement, investors have a written document to make prudent and rational decisions.
By creating an Investment Policy Statement, you’ve established a plan to confront complex issues, and have identified a systematic discipline for decision-making.
In doing so, you’ll have the advantage of clarity with your expectations and goals. You will better understand what to expect in the advisory relationship.
With an Investment Policy Statement, both the advisor and client can make prudent, rational decisions about investments with confidence.
- Setting Objectives
Set clear and definable expectations, risk tolerance, return objectives and guidelines for investments.
- Defining the Asset Allocation Policy
Create a structure and identify the investment asset classes used to achieve a diversified portfolio and determine how those assets are best allocated toward larger goals.
- Management Procedures
Provide a guide for selecting, monitoring and evaluating the performance of the invested assets and how to appropriately manage changes.
- Communication Procedures
Establish a clear protocol for communicating both processes and objectives among all parties involved, while assigning responsibility for implementation.