That question isn’t considered by most investors, but it should be.
An investment policy statement is a formal written policy that indicates how you want your money managed and why it’s being managed in that way.
Typically it’s interchangeable with the term “financial plan”, however it differs in one significant way; a financial plan typically indicates what you’re doing and why, whereas an investment policy statement indicates how you want your money managed, and why.
Usually a financial plan is constructed by an advisor to be used on behalf of the client, and an investment policy statement is crafted by the client to be used by the advisor.
It’s used as a measuring stick to ensure your plan reflects your desires and values.
It’s an accountability tool for your advisor.
Here are the main sections:
Investment Philosophy: Investment philosophy is a set of guiding principles that inform and shape an individual’s investment decision-making process.
Asset Allocation: Specifies your ideal asset allocation and how much you’re willing to have the plan deviate.
Risk Tolerance: Specifies whether you have a low, medium or high risk tolerance and explains what that is based on.
Funds & Accounts: Types of funds you’re open to using.
Holding Limits: The maximum percentage of your entire portfolio you’re comfortable holding in each asset class.
Liquidity Needs: How much of your money that needs to be liquid based on your current needs.
Time Horizon: Your time horizon for retirement, for upcoming life changes, liquidity needs and risk tolerance.
Contingency Plan: Specifies how the plan will be adjusted if it doesn’t work out as hoped.
Most investors are just normal folks. They do what they do for a career and they’re good at it. They don’t spend hours learning about strategic investing and comprehensive retirement planning so constructing something like this seems daunting.
It doesn’t have to be. As long as you’re working with the right person, they should be able to break down your options for you in a way you can understand.
Often you’re at the mercy of your advisor for what they’re willing to deliver to you. Having a simple document like this, that is signed by both you and your advisor, allows you to pull it out during quarterly, annually or semi-annual reviews with the advisor and clarify whether or not your wishes are being carried out.
The frequency of your account reviews should also be agreed upon with the advisor. If you have a review that doesn’t mean you must make changes. In fact, according to industry surveys 70% of the time when a client comes in for a review, no changes are made.
This should be a living document that should be updated as you go through life changes.
If you lose your job, retire, buy a home or have a spouse pass away, your financial situation will be likely to change and thus your investment policy statement and strategy should be updated as well.
Trust with your advisor is important, but it’s important to remember that you’re the only one that has to deal with the consequences of your plan not working.
Consider constructing an investment policy statement with your advisor and reach out to us with additional questions.