What are the key components of an Investment Policy Statement (IPS)?

The Investment Policy Statement (IPS) is essentially the blueprint for managing a client's portfolio. It documents the client's objectives and constraints, and serves as the governing document that both the investor and portfolio manager agree to follow.

The IPS has two main sections:

1. Objectives (the "what")

• Return objective: What rate of return does the client need? This could be absolute (e.g., 7% nominal) or relative (e.g., beat inflation by 4%). It should reflect both the client's required return (to meet goals) and desired return (aspirational).
• Risk objective: How much volatility or downside can the client tolerate? This has two dimensions:
• Ability to bear risk (financial capacity — long horizon, large wealth, stable income = higher ability)
• Willingness to bear risk (psychological tolerance — does the client panic in drawdowns?)

When ability and willingness conflict, the more conservative one governs.

2. Constraints (the "how")

Remember the acronym TTLLU:

Example: Consider Dr. Sarah Chen, age 40, earning $350K/year as a surgeon with $2M in savings. She wants to retire at 60 and needs $120K/year in retirement.

• Return objective: ~6% real to grow $2M to meet retirement spending
• Risk tolerance: Above average ability (high income, long horizon), moderate willingness (she worries about market drops)
• Time horizon: 20 years to retirement + 30 years in retirement = multi-stage
• Liquidity: Low near-term needs
• Tax: High marginal bracket — favor tax-efficient strategies
• Unique: Wants to avoid pharmaceutical stocks (professional conflict)

The IPS should be reviewed and updated periodically (at least annually) or whenever the client's circumstances change materially.

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