Investing your hard-earned money is one of the most critical decisions you will take on life. Just like building a house or embarking on any other important activity, you need a map out a strategy on how to get to the right destination.
An Investment Policy Statement (IPS) is a document that communicates a client’s investment goals and the strategies that will serve as a guide for managing a portfolio.
The IPS can also be defined as a map, activity schedule and outcome document between a financial advisor and a client. A client can include and individual investor or a company.
Importance of an Investment Policy Statement
- The IPS serves as a guide in ensuring that clients stay focused on their states objectives which they may be tempted to deviate from when market conditions worsen.
- The IPS keeps both the client and advisor on the same investing page and holds both parties accountable to a certain standard. This Is because the expectations as to what both parties would be doing will be clearly stated.
- It helps in ensuring transparency in the relationship between advisor and client.
Elements of an Investment Policy Statement
However, an IPS should contain these elements regardless of who the client is;
- Client
- Duties of Financial Advisor
- Financial Objectives/Goals
- Risk and Return Expectations
- Time Horizon
- Target Asset Allocation
- Diversification Policy
- Performance Monitoring
Using the elements stated above let’s draft an investment policy for Mr XYZ hoping to retire in a few years’ time.
Client
Mr XYZ
Age: 45
Married with 2 children
Current Assets: N10 million
Duties of Financial Advisor
To help the client meet long term financial goals.
To Create the right mix of Asset Allocation.
To select assets in accordance with asset allocation providing sufficient diversification of risk and returns.
Monitor all investment options and valuation of portfolio holdings on a regular basis.
Provide monthly reports that shows assets, inflow and outflow of cash, income, and monthly change in value of total portfolio.
Financial Objectives/ Goals
Return Goal: 50%
Financial Independence and retirement at age 60
Legacy: To leave debt-free properties to each of his two children in a choice area in Lagos.
To travel to different countries in different continents within a year if retirement.
Risk & Return Expectation
Conservative Investor
Time Horizon
Target retirement year: 15 years from now.
Target Asset Allocation
Treasury Bills – 50%
Equities – 25%
Commercial Paper – 10%
Cash – 10%
Property/REITS – 5%
Diversification Policy
No one fund or account should comprise more than 50% of a given asset class, except cash, with a 45-50% threshold for rebalancing.
Performance Monitoring
The portfolio will be reviewed annually on the end of January of each year.
When next you want to hand over some money to a financial advisor to invest for you, it is best you talk to him/her about drafting an Investment Policy Statement that will keep both parties on the same page about investment objectives and returns.
