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Posted: June 09, 2009

Turn your investment dreams into reality

How to craft a stellar investment policy statement

John Trujillo

A goal is only a wish if it’s not written down. The same is true when it comes to investing.

An investment policy statement, or IPS, is a document that simply puts investment goals and objectives on paper. Academics have researched and studied the importance of investment policies and suggest that these statements play a large role in account performance.

A simple internet search for “investment policy statements” will result in pulling many policies for large institutions, such as pensions and foundations. Big-dollar institutions have been using investment policies for years. Yet it is amazing how many portfolios do not have a written policy and how many investors have never been advised to write one.

Policy construction is relatively simple. The purpose of the policy is to inform all of the account’s interested parties, including the owner, investment managers, accountants, etc., of the goals, objectives and constraints of the account. It is the business plan of the account — an essential tool for directing and communicating the activities of the portfolio while establishing clear expectations.

The anatomy of an IPS

The following are details that may be included in a policy:

• Long-term goals and objectives
• Appropriate risk/return profile for the account (i.e. asset allocation guidelines)
• Definition of a prudent investment process
• Rules and responsibilities of interested parties (i.e. investment managers, attorneys, etc.)
• Proper monitoring and evaluation of the portfolio
• Constraints of the portfolio such as tax, legal or liquidity issues
The policy should be detailed so that it creates discipline and avoids unnecessary differences of opinion, yet is flexible enough that advisors can add value to the portfolio.

The benefits of the policy outweigh any inconvenience of writing one. One of the keys to successful investing is having discipline. Investors who avoid heat-of-the-moment decisions and reactions will be ahead of the pack. A primary result of a policy is discipline. 

Another benefit is clear communication. Unfortunately, miscommunication is not uncommon and can occur to anyone at any time if proper measures are not implemented.  Avoiding this will result in a better environment and results for all involved parties.

Also, it is important to note that investment polices are not always optional. The law clearly states that investment policies are required when fiduciaries, persons who have the legal responsibility for managing someone else’s money, are involved. Therefore, investment committees of retirement plans, investment advisors, consultants and trustees of private trusts all are required to establish investment policies.

Be involved

As an investor, it’s important to remember why there is a need for an investment policy. Simply said: It’s there to ensure that financial objectives are met. Therefore, you need to be involved in the policies – not only when writing them, but in using them to oversee the ongoing activity of portfolios.

Financial advisors can only take on part of the role of writing a policy; they can assist you with identifying and clarifying their goals and objectives. The other part of writing the policy is up to the owner of the portfolio. Unfortunately, it is not uncommon to find individual investors who spend more time and effort analyzing the purchase of a $1,000 television than they spend on assessing the goals and objectives of their portfolios. You must be involved, and if it’s foreign territory or you become confused along the way, you need to know that it’s perfectly acceptable to stop and ask lots of questions until you feel comfortable.

An investment policy may merely sound like more paperwork, but it is an important part of the investment process. It can be surprising how something so simple can improve a portfolio’s performance.

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John Trujillo is SVP, Senior Portfolio Manager of UMB Private Wealth Management in Denver. John may be contacted via email at

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