For us within Capital Research Advisors, an investment policy statement is a written agreement between the investor(s) and the assisting investment manager (management team) recording the agreement(s) the two parties come to with regards to how the investor’s money is to be managed. We generally take information from the investor(s) and create a draft IPS to be reviewed, edited and finally arrived as the working document.
In some cases, the IPS may also be created with/by an investment committee (e.g., those charged with making investment decisions for an endowment or pension plan) to help establish and record its own desired policies to assist in future decision-making or to help maintain consistency of its policies by future committee members or to clarify expectations for prospective money managers who may be hired by the committee.
The presence of an IPS helps each of us to clearly communicate to all relevant parties the investment philosophy, understandings, guidelines and constraints to be adhered to by the parties.
It can be seen as a directive from the client to the investment manager(s) about how the money is to be and will not be managed. The IPS provides the guidelines for all investment decisions and responsibilities of each of the party(s). As a policy document rather than an implementation directive, the IPS should provide guidance for who will make the investment decisions, the overall parameters used to make the decision, and how they will (will not) be made. It does not include a list of the specific securities to be used.
When the investor is an individual client, as a general rule, the investment manager (working in concert with the financial advisor if they are separate) has the responsibility of creating the document, since the manager is generally more familiar with its purpose and normal content. Both the manager and the client generally sign the document, indicating acknowledgment of and agreement to its several parts. This can serve to protect both parties in the event of a future disagreement(s), as long as they have respectively adhered to the content of the IPS. A properly written investment policy statement can be critical in minimizing the legal liability of those serving in a fiduciary capacity (e.g., qualified plan trustees and trustees of irrevocable trusts, endowments, foundations and charitable trusts).
Today, use of an IPS with each investment client is now considered a best practice for investment managers and should be expected by clients hiring a professional investment manager.
The presence of an IPS is to help to create an environment of transparency in the relationship between client and advisor. The IPS offers clients a better understanding of what to expect from their advisor and investment manager(s). That clarity generally helps to build a much higher level of trust and respect and it helps ensure the investment manager is aware of the expectations of the client.