Investment Policy Statements: A Roadmap to Meet Your Financial Objectives

Michelle Watson CFA and CAIA

Chief Investment Officer
First Republic Investment Management

February 17, 2016

Throughout 2016 we will be running a series of articles focused on several time-tested principles of investing. These articles are intended to highlight insights around these principles and provide a refresher as to what makes them important concepts to continue to focus on. The article below from Chief Investment Officer Michelle Watson will be the first in this Investment Bootcamp series.

It has long been the standard of institutional investors (such as endowments and pension plans) working with consultants to put in writing a comprehensive understanding of the institution’s investment objectives and how those objectives are going to be met. This document is commonly known as an Investment Policy Statement (IPS).

An IPS is just as critical for individual investors for a number of important reasons. For one, it helps your portfolio manager gain a clear understanding of your risk tolerance and financial objectives. It serves as the long-term roadmap for meeting those objectives. Individuals have a tendency to follow our emotions, sometimes making emotion-driven investment decisions. Thus, an IPS can help you stay the course and adhere to long-term investment plan.

Below we discuss important considerations to include in the process.


"Taking the time to carefully craft your plan, document it and reviewing it carefully makes it easier to discover if you have forgotten to include any important considerations or include them in discussions with your portfolio manager."


Components of an Investment Policy Statement

An IPS should include a comprehensive discussion of your investment objectives. And while this seems like this would all about the numbers, it is more a story about your life goals (retirement, paying for the children’s college education, taking vacations, buying homes, etc.) and how you feel about taking risk. A narrative of who you are, how you earned the money being invested and your future goals for your life are all important components. The more details you know and have documented, the better positioned you are for creating a roadmap to success.

From the narrative, the portfolio manager gets details that help in designing the portfolio asset allocation. Key components include:

·         Timing of the investment objective

·         Cash flow needs

·         Tax situations

·         Risk tolerance – how much loss do you feel comfortable sustaining

·         Any restrictions or preferences in investments

·         The legal structures of the accounts being managed

The next part of the IPS is the investment plan to meet your investment objectives. This is the design of the portfolio and typically includes the types of investments that will be included in meeting your goals – the asset allocation. To give the portfolio manager the ability to manage in different market environments, ranges for each investment or asset class are provided for flexibility.

Around the investment plan or asset allocation, reasonable expectations of risk and return can be outlined. Taking the time to carefully craft your plan, document it, and reviewing it carefully makes it easier to discover if you have forgotten to include any important considerations or include them in discussions with your portfolio manager. It also is also a tool to help keep you and your portfolio manager on the same page, and avoid potential misunderstandings over the direction of your investment portfolio.

An Investment Policy Statement is a working document – dynamic not static

It is important to remember that an IPS is a working document. This means that it should be reviewed on a regular basis. It is very important that any life changes and new financial goals be reflected in the plan. Life often takes new turns (e.g. getting married, having children, selling a business, taking care of a parent), and making sure your portfolio manager is aware of these changes is important in achieving your objectives.

With a clear IPS in place, your investment plan and strategy will be the driver during periods that might otherwise trigger emotion-driven investment responses. Having a roadmap will serve you well in meeting your lifetime goals.

This article is for information purposes only and is not intended as an offer or solicitation, or as the basis for any contract to purchase or sell any security, or other instrument, or to enter into or arrange any type of transaction as a consequence of any information contained herein.

All analyses and projections depicted herein are for illustration only, and are not intended to be representations of performance or expected results. The results achieved by individual clients will vary and will depend on a number of factors including prevailing dividend yields, market liquidity, interest rate levels, market volatilities, and the client's expressed return and risk parameters at the time the service is initiated and during the term. Past performance is not a guarantee of future results.

Investors should seek financial advice regarding the appropriateness of investing in any securities, other investment or investment strategies discussed or recommended in this report and should understand that statements regarding future prospects may not be realized.

©First Republic Investment Management, 2016


This article is for information purposes only and is not intended as an offer or solicitation, or as the basis for any contract to purchase or sell any security, or other instrument, or to enter into or arrange any type of transaction as a consequence of any information contained herein.

All analyses and projections depicted herein are for illustration only, and are not intended to be representations of performance or expected results. The results achieved by individual clients will vary and will depend on a number of factors including prevailing dividend yields, market liquidity, interest rate levels, market volatilities, and the client's expressed return and risk parameters at the time the service is initiated and during the term. Past performance is not a guarantee of future results.

Investors should seek financial advice regarding the appropriateness of investing in any securities, other investment or investment strategies discussed or recommended in this report and should understand that statements regarding future prospects may not be realized.

©First Republic Investment Management, 2016