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What Is an Investment Policy Statement?

There is no such thing as a “one-size-fits-all” financial plan. We all have different financial needs and goals. A good CERTIFIED FINANCIAL PLANNER™ understands that; but none of them can read your mind. How can you, the client, efficiently communicate your goals to your CFP® for them to create the best financial plan for you? The answer lies in an investment policy statement.

What is an Investment Policy Statement?

An investment policy statement (IPS) is a document created between a client and their CFP®. It outlines the client’s general investment goals, risk tolerance, time horizons, liquidity needs, and tax considerations. This document details the strategies your CFP® will use to pursue these goals, regulatory requirements, policies, procedures, and responsibilities agreed to by the client. 

An IPS is a great tool to help your CFP® understand your goals, reduce compliance risk, and offer guidance through the process of implementing, managing, and periodically reviewing your investment portfolio. 

What are the Benefits of an IPS?

Not all financial planners use an investment policy statement. We think that’s a mistake. Look at the benefits an IPS offers.

It’s a “Get to Know You”

Money is a taboo subject; we don’t talk to many people about our personal finances. You share things with your CFP® that you may not even share with your closest family members and friends. That makes the relationship particularly intimate. Drawing up an IPS is your chance to open up to your CFP®; allowing them to get to know you and create a financial plan that is customized to your life. 

It’s a Touchstone

Even casual observers of financial news can get spooked when they see a “THE SKY IS FALLING” headline. This can cause people to make emotion-based decisions. A carefully crafted investment policy statement can help “talk you down” when the news all seems bad and you want to deviate from your financial path. 

It’s Documentation

Have you ever gone food shopping without a list? Forgotten to write down a “to-do” list on a day when you have plenty to get done? Inevitably, you leave the grocery store without a critical ingredient or forget about that doctor’s appointment you needed to schedule three months out. An IPS is your financial to-do list; a way to ensure that nothing important is forgotten. 

But Not Set in Stone

When you encounter major life changes (getting married, having a child, buying a home, or getting a divorce), you will need to make changes to your finances. If you don’t have a plan, you’ll find yourself scrambling to make one up “on the fly”. This is hardly ideal. 

Your investment policy statement will only require minor tweaks to ensure that your overall financial plan remains on track. You do not need to create a plan out of thin air. Your IPS can be updated quickly and easily to address these vicissitudes. 

It Provides Continuity

You want a long-term relationship with your CFP®, but that person may move on (retirement, career change, move). If that happens, your IPS will help ensure the continuity of your plan and give the new CFP® a clear picture of your goals. 

What Is Included in an IPS?

Because all investment policy statements are customized, not all these elements will necessarily be included. These are some general components. 

Your Objectives: What do you want your money to do for you and when? Your objectives should include your short-term goals (paying off debt, saving an emergency fund), medium-term goals (buying a home, buying a rental property), and long-term goals (saving for a child’s college education, saving for retirement). 

Your Risk Level: This can be hard for some investors to get right. Some people have no fear and are willing to take too much risk with their portfolio. Others are so risk-averse that left to their own judgement, they won’t outlive their money. Determining the correct balance in portfolio can position it for growth and provide stability. This is one of the most valuable things a CFP® does for their client. 

Asset Classes to Invest In: And not to invest in. There are the three main categories we are all familiar with: stocks, bonds, and cash/cash equivalents. Some investors include real estate, precious metals, and commodities in these classes. From there, you can further categorize asset classes based on the underlying securities. If this sounds foreign to you, don’t worry. Your CFP® is fluent! 

Target Asset Allocation: Your financial goals, time horizon, risk tolerance and asset classes (as defined in your IPS) will be the basis on which your asset allocation is created. All these factors define how much of your portfolio should be allocated between stocks, bonds, and cash. 

How Often Should You Revisit Your IPS?

Your IPS is not set in stone. In order to be as effective as possible, it will need to be revised from time-to-time. At a minimum, you should review your IPS once a year. Schedule it around another timed event (like doing your taxes or renewing your health insurance policy). 

These regular reviews can help remind you what’s important and help you stay on track. This is especially important when things are going great, you’ve received a big raise, or inherited money. These are things that can prompt you to take additional risks with your portfolio. It’s also important when things aren’t going well, either for you personally or in the macro economy. These are things that can prompt you to decide based on emotion. 

It is also beneficial to revisit your IPS is when you are undergoing a major life change (marriage, having a child, or getting divorced). A good IPS can accommodate these changes without upsetting the team. 

Take It to the Next Level

An IPS is not something many investors have. They require a great deal of thought and planning. Many people would rather not spend the time and energy required to work with a CERTIFIED FINANCIAL PLANNER™ in creating one. But if you really want to take your financial plan to the next level, an investment policy statement is an invaluable tool.

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. No strategy assures success or protects against loss. Investing involves risk including loss of principal.