An investment policy statement is an invaluable planning tool that adds discipline to the investment process.
Before developing an IPS, an investment manager must conduct a fact finding discussion with the client to learn about the client's risk tolerance and other specific circumstances.
The IPS can be thought of as a roadmap which serves the following purposes:
- It helps the investor decide on realistic investment goals after learning about financial markets and associated risks.
- It creates a standard according to which the portfolio manager's performance can be judged.
- It guides the actions of portfolio managers, who should refer to it from time to time to assess the suitability of particular investments for their clients.
- An introduction that describes the client.
- A statement of purpose.
- A statement of duties and responsibilities, which describes the duties and responsibilities of the client, the custodian of the client's assets, and the investment manger.
- Procedures that outline the steps required to keep the IPS updated and steps required to respond to various contingencies.
- The client's investment objectives.
- The client's investment constraints.
- Investment guidelines regarding how the policy should be executed (e.g., whether use of leverage and derivatives is permitted) and specific types of assets that must be excluded.
- Evaluation and review guidelines on obtaining feedback on investment results.
- Appendices that describe the strategic asset allocation and the rebalancing policy.