Investment Policy Statement

What Is an Investment Policy Statement, and Why Do You Need One?

If you run an investment company, it is important for you to have a strong investment policy statement. You should think of this as a guide for how you might handle a client’s money. If you are investing money on behalf of someone else, they are putting a tremendous amount of trust in you. They are counting on you to not only provide them with a solid return on their investment but also to protect their Capital. As a result, you should put together an investment policy statement that will clearly let the client know how they should expect their money to be invested.

What do you need to know about putting together an investment policy, and how can you make sure you have a comprehensive policy that covers all the necessary aspects? Learn more below, and do not hesitate to reach out to an expert who can help you.

What Is an Investment Policy?

So, what exactly is an investment policy? And an investment policy statement is a document that is usually drawn up between a portfolio manager and a client. It is going to outline the specific rules that the portfolio manager should follow when they are handling the client’s money. The statement should provide a general overview of the goals and objectives of the client.

Then, the statement should provide an overview of how the portfolio manager is going to use different strategies to try to achieve those goals for his or her client. There are specific components that should be included in an investment policy, including information regarding risk tolerance, liquidity requirements, and asset allocation. The degree to which each of these individual factors is defined can vary from portfolio to portfolio.

Who Should Have an Investment Policy?

In general, anyone who is investing money on behalf of someone else should have an investment policy statement in place. Typically, an investment policy statement is drawn up for institutional clients. For example, a mutual fund will probably have an investment policy in place for those who invest in that specific fund. Furthermore, retirement plan sponsors will probably also have an investment policy in place, which is important for individual clients. It is also not unusual for a financial advisor to draft an investment policy statement for new clients before they move forward. An investment policy statement is important because it provides some degree of transparency to the proceedings.

Does an Investment Policy Name Specific Asset Classes?

There is no specific rule that has to be followed regarding what is included in an investment policy statement and what is not. However, over the years, certain policies and procedures have been put in place to make sure investment policy statements look similar from portfolio to portfolio. That makes it much easier for investors to make decisions about where and how they want to invest. For example, an investment policy statement may make specific declarations about certain asset classes to avoid.

The client may also make it known which asset classes he or she prefers. This is important for developing a strong risk-return profile. Different clients have different risk tolerances, and it is important for portfolio managers to be aware of those tolerances before they move forward.

Should There Be a Periodic Review Process?

It is also not unusual for an investment policy statement to have a periodic review process. For example, the policy statement may indicate that it is important for clients and managers to review their Investments at least once per quarter. This tends to be a nice review policy because publicly traded companies usually release their earnings once per quarter. This will give the manager an opportunity to sit down with the client and make sure they are on target. There are certain long-term goals that have to be hit, and there will be some short-term volatility; however, it is also important for portfolio managers to evaluate their returns from time to time to see if anything has to be adjusted before they move forward.

What Are the Different Components of an Investment Policy Statement?

An investment policy can be laid out differently from company to company, but in general, there is an expected rate of return on the portfolio. This might be quantified as a rate of return when compared to inflation, and a rate of return overall. There is no guarantee this return is going to be hit, but it is important to have some expectations in place. The investment policy might also include information about cash requirements and the investment period. There is also a section for a designated risk tolerance, which is usually quantified as a percentage of portfolio loss in a given year. It is important for clients to be familiar with the information in their investment policy statement, as it will allow them to hold the portfolio manager accountable.

Have a Strong Investment Policy for Your Clients

In the end, these are just a few of the most important points you should keep in mind when it comes to putting together an investment policy. Investment policies can vary slightly from company to company, and you should not hesitate to take a look at a few examples if you are looking for a possible model for your investment policies. With a clear investment policy in place, your clients will feel more comfortable about letting you invest their money for them.

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Christophe Rude

Christophe Rude

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