What Is an Investment Policy Statement?

by Jeff C. Johnson

Eight Points of Financial Confidence book

For years, institutional investors and their advisers have created Investment Policy Statements, known in the industry as “the IPS.” It’s the document that governs the investment of money, reflects the intent of the investor, and outlines their long-term plan. It’s a road map to get everyone back on the same page when the inevitable detour, such as a big decline in value, takes financial progress off course.

Investment Policy Statement is quite a mouthful, so “IPS” is an industry-standard description. There are no specific requirements, and every investment advisory firm is free to develop their own, though many Main Street investment firms do not have such a document at all.

My firm, Buckingham Strategic Wealth, works with clients to build a customized, detailed plan that connects their most important values with their financial goals. Included in the document, which clients review and sign, is a discussion of the approach that the firm takes in planning for the long-term future of the client. It also includes a summary of our investment philosophy and the risks of investing, as well as a historical perspective of the recommended asset mix for the client.

Additionally, the fees and expenses of investing are fully disclosed and should be understood and discussed with a wealth adviser. My experience is that many, if not most, investors do not understand or are unable to identify their true cost of investment.

Other specific objectives should also be included, such as the “Plan B” if the investment path set forth in the IPS is blown far off course. (See my next post for a discussion of your Plan B.)

In my book The Eight Points of Financial Confidence I outline the importance of having a written plan, such as the IPS or other document, to help investors stay on course during the most difficult times when logic must prevail over emotion.