Investment policy statements: A roadmap for volatile markets

September 22, 2011

With the markets still gyrating like a yo-yo, most investment advisers have likely been barraged with questions from their clients. But investors tend to make the worst decisions when confronted with chaos.

To avoid a reactionary and emotional response to market swings, consider an investment policy statement (IPS). An IPS is an honest assessment of your investment goals and objectives and clearly identifies how you plan to achieve them.

Are you saving for a your child’s college education, retirement, a second home? Your IPS lays out your investment constraints, your risk tolerance, and can include your expected rate of return and your portfolio rebalancing schedule, among other details. “It is a roadmap,” says Elle Kaplan, founding partner and CEO of Lexion Capital Management, an investment advisory firm in New York. “It is a flexible, living document that changes with life circumstances.”

IPSs have been around a long time but investors drift away from them during bull markets. Given the current market volatility and the expectation that it will continue, it is no surprise IPSs have made a comeback.

“Investors got re-introduced to risk in the early 2000s and ultra-high net worth individuals started to look at best practices of the institutions,” says Sharath M. Sury, executive director of the Institute for Financial Innovation & Risk Management and an adjust professor of economics at the University of California at Santa Cruz. “As people got educated about risk, they adopted ways to control or discipline their investment managers,” she says. If you have a registered investment adviser, an IPS is considered a best practice.

Unfortunately, “not enough clients do them because it requires a lot of work on their part,” says Margaret Franklin, chair of the Board of Governors of the CFA Institute and CEO of Kinsale Private Wealth in Toronto. In many cases, says Franklin, investment policy statements are either too formulaic or pre-formatted and not customized. “Managers should spend more time with clients, ask more provocative questions and listen more,” she says.

To make the most out of your IPS, consider the following guidelines:

Review regularly
What often happens is that investors and advisers develop an IPS and then put it aside. “The policy isn’t just a thing you write and put away,” says Franklin. “You have to relook at the policy and make sure you know what it reflects,” she says. Most advisers recommend a quarterly review or an update if your life circumstances change.

Stick to it
It is one thing to have an IPS, but it is another thing to follow it. “The real problem is that clients don’t tend to stick to the IPS,” says Sury. “The fact of the matter is, it really should be a contract between you and your adviser.”

Make it legally binding
Your IPS should be signed by your adviser and countersigned by you, the client. That makes it a legally binding contract, and it is the interest of both parties to make sure it is executed. “I have seen it used in litigation many times,” says Sury.

Many investors probably think that they don’t have enough assets to warrant such a policy. Not true. No matter what size your net worth you should have an IPS, says Kaplan. With one, “people would have better [investing] outcomes,” she says.

No comments so far

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see