Investment policy statement: Essential documents for institutional investors

Thought Leadership on Accounting and Finance presented by CliftonLarsonAllen.

A well constructed investment policy statement (IPS) is an essential governing document that can significantly improve the oversight of your institutional investment funds. Unfortunately, the IPS is often overlooked and under-appreciated by financial professionals.

Only about 10 percent of investment policy statements we review are properly written and complete. We believe this should be particularly troubling to most institutional investors because they are generally required to operate as fiduciaries towards these funds. The definitions, guidance, and benchmarks set down in the IPS help institutional investors meet the highest standard of duty to the beneficiaries of the funds.

Fill-in-the-blank is not enough 

Other than your investment advisor or consultant, there are not many places to get specific advice about how to write and manage your IPS. If you search the internet for an IPS template you will typically find generic, one-size-fits-all solutions. That may not be surprising considering that the most useful IPS is a highly customized document.

The CFA Institute, a global leader in promoting ethics and education for investment professionals, defines the IPS as a strategic guide that:

  • Anticipates issues related to governance
  • Plans for the appropriate asset allocation, internal and/or external investment managers, monitoring and reporting results, and risk management 
  • Establishes accountability
  • Offers an objective course of action during periods of market disruption

The definition goes on to call the IPS “… a highly customized document, uniquely tailored to the preferences, attitudes, and situation of each investor.” Clearly, an off-the-shelf solution will not even begin to address the unique needs and specific issues facing your institutional investment funds.

Why so many IPSs fall short 

We believe the dearth of specific IPS advice is the root cause of why nearly half of the IPSs we review are significantly deficient (i.e., need immediate attention). For example, many documents are not signed and dated. Others haven’t been reviewed, affirmed or updated in years, even though the fund is more mature, economic and market conditions have changed dramatically, and the needs of the beneficiaries have evolved. Still others are missing multiple key elements, such as specifying an appropriate “risk budget” and/or return objective. Some have unacceptably wide target ranges in their asset allocation (i.e., equities 30 to 70 percent).

About 40 percent of the investment policy statements we encounter appear well-written and thorough, but are nevertheless missing key information. They may not address the need for periodic estimation, review, and affirmation of investment management fees and expenses. Or, they may not adequately describe the potential sources and uses of funds that should be considered before adopting any specific asset allocation.

At its heart, an IPS is an agreed-upon framework that defines roles and sets boundaries and expectations for investible assets that is established by the governing body of an organization on behalf of the fund’s beneficiaries. Like the organization it serves, an IPS should be specific in its content yet flexible and open to change. Best practices dictate that the document should be reviewed at least annually and then either affirmed by the governing body or updated and then affirmed.

Read the full article here. 

Investment advisory services are offered through CliftonLarsonAllen Wealth Advisors, LLC, an SEC-registered investment advisor. CliftonLarsonAllen Wealth Advisors, LLC disclaimers

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