Blueprints for Your Financial Future

Investment policy statements can serve as a guide for you and your advisor.
March 22, 2018

Entrepreneurs don’t start a business without a plan and contractors don’t start a house without blueprints. Given the important role your wealth plays in your life, as an investor, you require your own strategy or blueprints to guide your way forward. An investment policy statement may fit the bill.

Typically a tool used by institutions managing significant assets, an investment policy statement (IPS) provides an opportunity to proactively define and document your investment goals and tolerance for risk with the completion of a risk assessment or questionnaire. They can help guide your relationship with your financial advisor, acting as a foundation and benchmark for you both as you work together to manage your wealth and pursue your financial objectives.

Finding Clarity

We often think of our financial goals as relatively straightforward. But in reality, once we consider market turbulence or our environment of increasingly complex investments, it’s rarely a simple matter.

Going through the exercise of a risk assessment – part and parcel with an IPS – prompts you to provide a detailed look at both your comfort with risk as well as your portfolio’s ability to weather that risk. For example, the idea of a 10% drop in the market may sound manageable to you, but if that means your $250,000 portfolio drops by $25,000, will you still be comfortable? In such an event, would you be tempted to make impulse decisions or would you trust in the long-term plan you’d previously laid out? These are the moments in which an up-to-date IPS can serve as a valuable guidepost for you and your financial advisor.

Further, the discussions you’ll have when you develop your IPS can help you to clarify not just your financial objectives but also reveal the personal motivations behind them, including the aspirations you have for your family, career or enduring legacy. Defining those, in turn, makes it easier for your financial advisor to ensure your portfolio continues to support your long-term vision for the future.

Your Financial Touchstone

Wealth is a highly personal matter, touching each facet of our lives. It’s only natural that temporary volatility that may seem to threaten your financial well-being and the wealth you’ve worked hard to amass could spark some emotion or stress. In periods of market turmoil, seeing the immediate decline in your assets will undoubtedly be more distressing in the moment than when imagining the mere possibility of such an event while in the comfort of your financial advisor’s office.

If and when the market takes a downturn, an IPS can serve as a grounding tool – which is exactly how they’re used by institutions tasked with the management of significant assets. An IPS helps to keep them from straying from their mandate, while pursuing their objectives, and it’s this disciplined, steadfast approach that allows institutions to outperform individual investors time and again. In a 2015 report from Dalbar, the average institutional investor outperformed the average diversified individual investor over the previous 20 years, by a factor of three (7.31% vs. 2.11%). The pattern repeats itself over shorter time periods, too. Adhering to a long-term investment plan may account for some of the differences among average investors, although there are disciplined individuals who remain focused on their long-term financial plan and achieve better results over time.

Going through the measured and thoughtful practice of creating an IPS can help you stay confident and focused on your long-term goals, and avoid making emotional decisions in the moment.

Common Ground for You and Your Advisor

Your relationship with your advisor will be a long one – one that has seen you through many milestones, but also one that will see your children do the same. And as your life evolves, an IPS will serve as a benchmark for both you and your advisor, ensuring neither of you loses sight of the future you’ve long been working for. You could be a testament to the power of steadfast, long-term planning guided by an IPS, your advisor and yourself.

In addition to your risk tolerance and financial objectives, an IPS will give you an opportunity to define the roles and responsibilities you and your financial advisor each hold within your partnership, as well as the roles of other professionals such as accountants and portfolio managers. If you and your financial advisor do part ways, say after a move or retirement, having this document will make a potential transition that much easier since your goals and expectations have been laid out.

A Living Document

Think of your IPS as something that will evolve as your life does, likely needing adjustment as you reach milestones or life events including an expanding business, a growing family, the purchase of property or retirement. Consider even using your IPS, or a summary of it, as a guide and reference point for your quarterly review. Year-end may also be a good time to schedule your annual review of the document itself to ensure it continues to reflect your needs and wishes, and support your long-term financial health.

The Architecture of an IPS

Make sure to cover these key elements when drafting your IPS.

Investment Objectives and Constraints

What is it that you’re hoping to accomplish by investing? What is your risk tolerance? This section also will detail your time horizon, contribution and withdrawal needs, tax considerations, as well as target return goals.

You’ll also share your personal motivations behind your financial objectives. Do you have strong preferences for sustainable companies or companies whose values mirror your own?

Outline what you want your wealth to do – fund an active retirement; help you pursue a philanthropic legacy; or further education for your loved ones – and who you want to benefit as your money grows. Be sure to update this section as your goals change or evolve.

Portfolio Allocation

Based on your risk tolerance and return objectives as well as any constraints you’ve established, your advisor will help you determine the appropriate mix of assets that align with your overall investment philosophy. Here, you’ll lay out your portfolio preferences including how and where you’d like your assets allocated among various investments with different risk/reward profiles. These details should change as your tolerance for risk does, particularly when nearing or entering retirement.

Roles and Responsibilities

How hands-on would you like to be? Clarify what you and your family are responsible for, and what your financial advisor is responsible for. By taking the time to define your roles and having it in writing, you can both better manage expectations, as well as your relationship, moving forward. Be sure to update this section as your priorities change.

Rules for Rebalancing

Together with your advisor, determine how often you’d like to review your portfolio and rebalance or reset it in an effort to stay close to your ideal asset allocation model. This will include whether you’d like your dividends reinvested or disbursed to you as cash. Some leave this for their annual review, while others prefer to rebalance or reset more frequently to stick closer to their ideal allocation, which can drift over time. As you make updates to your asset allocation goals, make sure to review and update your rebalancing preferences, as well.

And Now, the Don’ts

We’ve covered the do’s. When it comes to your IPS, make sure you don’t:

  • Underestimate time horizons. For investments, these can extend much longer than most might think, even past your retirement or passing.
  • Generalize your goals. Get specific. Are you hoping to buy a cabin in Colorado with room for grandkids, or spend a certain amount each year on travel?
  • Use jargon or vague language. Avoid wording that is either too restrictive or too broad and could get misinterpreted down the road.
  • Abandon an IPS that needs fixing. It’s normal if your first stab at an investment policy isn’t quite right. Don’t scrap it altogether but instead work with your advisor to determine where adjustments make sense.
  • Set it and forget it. Your IPS should be a flexible, living document. When your life changes significantly, talk to your advisor to see if updates to your IPS might be needed, too.

Given its role in your life, your wealth is far too important to gloss over. Going through the practice of creating and updating an IPS will ensure you’ve considered each element of your investment strategy – all while helping your financial advisor to maintain a thorough understanding of your priorities and goals. 


Investing involves risk, and you may incur a profit or loss regardless of strategy selected. Past performance may not be indicative of future results. The performance noted does not include fees or charges, which would reduce an investor’s returns. Diversification and asset allocation do not ensure a profit or protect against a loss. The process of rebalancing your portfolio may result in tax consequences. 

Source: The Globe and Mail; Investopedia; USA Today; Wilshire Advisor Solutions; Dalbar