Your Investment Policy Statement should address the following:

Strategy

The strategy section of the IPS should outline how your portfolio will be managed and summarize your objectives for the account. The account could, for example, be managed on a discretionary basis, like with our Portfolio Management Service, or it could be managed on an advisory basis. Objectives might include income, growth, or capital preservation.

Time horizon

A time horizon should be indicated that reflects your financial planning goals. This doesn’t mean that there cannot be withdrawals or additions to the account before the time is up, but certain investments are time-sensitive. For example, if a US government note that pays a coupon of 5% is purchased at par, it is reasonably certain (barring a default of the US government and assuming a 5% reinvestment rate) that a yield of 5% will be realized if the note is held to maturity. However, if interest rates go up, the market price of the note will likely go down, and if it is sold before maturity, a lower yield may be realized.

Expected risk and return

Risk and return go hand-in-hand. We would all like to have a low-risk portfolio that yields a high rate of return, but the reality is that there is always a trade-off. An important choice needs to be made; guidelines can be set for risk and return, or definite limits. It is possible to put together a portfolio that has definite risk/return characteristics, however there is always a penalty to be paid for this assurance and that is usually that the portfolio will be limited as to its upside potential. Principal-protected investments work in this manner – in essence this type of investment is a combination of a risky investment and insurance, and you pay extra for the insurance.

Permitted holdings

It is important that portfolio holdings match the risk/return profile and time horizon. For example, a growth-oriented portfolio should contain a higher weighting to investments such as equities, whereas a conservative income-producing portfolio may be more oriented towards dividend-paying or fixed income investments.

Constraints

Constraints may be placed on the portfolio regarding, for example, the maximum loss that will be allowed prior to switching to a more conservative strategy, or the minimum amount of income required. Constraints can also be applied to the investment products used or to which company shares may be purchased for investment. For example, a company to which the investor already has substantial exposure through employment may be excluded, or more volatile small-cap or emerging market investments might be excluded as a group in a conservative portfolio.

Reporting

This is an important part of the IPS and the section that is most often neglected by financial advisors. It is necessary to keep track of how well your investments are doing with respect to your goals and also with respect to a benchmark. If performance is not measured and reported, then how will you know where improvement is necessary or whether your financial advisor is in fact adding value?

IAM provides quarterly updates and a comprehensive yearly review to Portfolio Management and Portfolio Advisory clients and the IAM IPS always includes an appropriate benchmark that is decided in advance and against which portfolio performance will be compared in the yearly review.