Family Office Investment Policy Statement


Understanding The Investment Policy Statement

Dignitas Family Office: Investment Policy Statement

Investment policy statements are frequently, though not always, used by investment advisors and financial advisors to document an investment plan with a client. It provides guidance for informed decision-making and serves as both a roadmap to successful investing and a bulwark against potential mistakes or misdeeds.

An IPS lists the investors investment objectives, along with his time horizon. For example, an individual may have an IPS stating that by the time they are 60 years old, they want to have the option to retire, and their portfolio will annually return $65,000 in today’s dollars given a certain rate of inflation.

A well-conceived IPS also delineates asset allocation targets as well. For instance, it specifies the target allocation between stocks and bonds, further breaking down the target allocation into sub-asset classes, such as global securities by region. The targets should then have a minimum and maximum deviation that, when exceeded, will trigger portfolio rebalancing.

An IPS should give special attention to describing the investor’s risk/return profile. That includes naming asset classes that should be avoidedas well as those that are preferred.

Creating A Living Document

The investment policy statement acts as the central point of reference between the client and the OCIO through each stage of the ongoing investment lifecycle. While certain portions like the setup and structure are static and evergreen, the primary components of the IPSsections on client discovery, asset allocation, portfolio construction, and governanceshould be dynamic.

This means that both the client and the OCIO should have an understanding that certain aspects of the statement will evolve over time, given changing market environments and expectations as well as shifting client needs and constraints. These shifts may include changes in the clients cash ows and spending policies.

For example, a client may come to the OCIO with what it thinks are achievable goals. But the OCIO may nd, and help the client realize, that to attain those goals, certain criteriasuch as investment objectives, asset allocation guidelines, benchmarking and manager selection guidelinesmay require adjustments.

While the investment policy statement is a living document, investment policies and guidelines should not change frequently. For example, short-term changes in the markets should not require an adjustment to the document.

Key Takeaways & Insights

Part 3 of our 4-part series focuses on why every trust should have a strategic approach to investment management.

  • The Prudent Investor Act favors an indexed-based investment approach for trust management.
  • Any trustee who believes in active investment management must be able to show how this approach will benefit the trust.
  • A formal Investment Policy Statement documents the trusts investment philosophy and provides the framework for investment decisions.

Every trust should have a stated approach to investment management, recognizing a trustees personal biases might be at odds with the trusts investment needs.

The Prudent Investor Act is predicated on a belief that there is no ability to efficiently capture market alpha, or outperformance of a benchmark, through active management. It favors an index-based approach to trust management where low fees and strong adherence to a portfolios benchmarks ensure the trust will keep pace with its asset allocation. Under this belief, the focus is on strategic asset allocation with tactical tilts in the portfolio balance to reflect market conditions. The strategy is executed through exchange-traded funds , option overlays and capital protected strategies.

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An Example Of An Investment Policy Statement

When visiting a new destination, it helps to map out the directions. Once you arrive, it’s a good time to make an activity plan. If youre going to a state park for a hike, you’ll want to determine how to get there and which trail to follow at the park.

Similar to an expedition, an Investment Policy Statement is a guide to your financial future.

As Responsible Investment Comes Of Age Family Offices Should Look Beyond The Label To Help Families Put Their Wealth To Work For Social Good

Investment Management, Risk Allocation, Asset Allocation ...

Many family offices are already playing a key role helping families transition to more responsible investment. Recognising the scrutiny which comes with their wealth, some families are demanding an increasing focus on Environmental, Social and Governance across their investment portfolio – a trend that can be seen across the alternative investment industry.

As PwC’s recent survey Older and wiser: is responsible investment coming of age? Private Equity Responsible Investment Survey 2019 shows, ESG issues have moved from niche to mainstream, with the majority of respondents adopting responsible investment policy and reporting ESG matters to their boards at least once a year.

Below are some suggestions on how family offices can begin to translate their commitment to responsible investment into concrete actions.

1. Adopt the common language

The survey found an increasing alignment to the Sustainable Development Goals , with over two thirds of respondents identifying and prioritising SDGs that are relevant to their investments in 2019. The SDGs are a collection of 17 goals adopted by all United Nations member states in 2015 and provide a blueprint for good growth nationally and internationally. Adopting the common global language for responsible investment early provides an opportunity for family offices to guide and shape investment strategies which can be easily communicated to stakeholders and actioned by third parties.

2. Dedicated resource

3. Monitoring and reporting

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Investment Policy Statements For Families: The Breakdown

By on December 11, 2020

A prospective client recently met with me as he wanted to change his Investment Advisor. When I asked about the reason why, he simply stated performance. When I then asked if his Investment Advisor had not measured-up against his Investment Policy Statement, he just looked at me with this blank stare and asked: Investment Policy Statement..whats that???? I replied that an Investment Policy Statement was the key document that enables a client to measure the success of his/her Investment Advisor. Again looking at me with a blank stare said, Nope.never heard of it! Given the growing investable wealth of many families, Im always shocked at how few investors have an Investment Policy Statement developed for them by their Investment Advisors. The purpose of this article is to highlight the importance of an IPS and the key elements that should be included in such a document.

In contrast, though, a growing number of Advisors shifted their practice from the Transaction advice model to one of providing Consultative advice. In this model, Advisors are focused on identifying the purpose of a clients money and the various financial goals associated with that money, and then structuring a portfolio of prudently selected investments to help meet those goals all the while being sensitive to each clients tolerance for risk and adjusting their portfolio appropriately. In the Consultative approach, an Advisor is primarily a Manager of Risk.

Investment Policy Statements For Families

By on April 24, 2010

A good friend of mine recently told me that he was changing his Investment Advisor. When I asked about the reason why, he simply stated performance. When I then asked if his Investment Advisor had not measured-up against my friends Investment Policy Statement, he just looked at me with this blank stare and asked: Investment Policy Statement..whats that???? I replied that an Investment Policy Statement was the key document that enables a client to measure the success of his/her Investment Advisor. My friend, again looking at me with a blank stare said, Nope.never heard of it! Given the growing investable wealth of many families, Im always shocked at how few investors have an Investment Policy Statement developed for them by their Investment Advisors. The purpose of this article is to highlight the importance of an IPS and the key elements that should be included in such a document.

In the private wealth world, an IPS does not need to be a lengthy document. Most IPS that weve used with family clients ranges from 4 8 pages, depending upon the complexity of each clients situation. As a result, a sound framework that weve used for years successfully with clients contains the following key five sections:

1. Statement Of Objectives & Risk Tolerances:

What is the purpose of the money as well as the quantified goal and timeline?

Will any income be required now ? If so, how much?

2. Portfolio Construction Guidelines:

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What Are The Features Of The Investment Statement Policy

A well-drafted Investment Policy Statement builds a systemized review procedure that helps the investor to remain focussed on the long-term objectives, even the economy or market changes in the short term. It contains all the current account details, current allocation, and how much has been collected and how much is presently being invested in different accounts.

Investment Policy Statements writes down the investors investment objectives, along with the time horizon. Much attention and focus are on describing the investors risk/return profile, involving naming value classes that would be avoided as well as naming preferred the asset divisions.

Additional Requirements For Registered Investment Advisory Firms

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RIA firms must be registered as providing investment management services with either the U.S. Securities and Exchange Commission or with the equivalent state office. RIAs have an even higher standard of care established by fiduciary standard to carry out their responsibilities with âgood faith, honesty, integrity, loyalty and undivided service of the beneficiaryâs interest.â The good faith clause requires RIAs to act reasonably in order to avoid negligent handling of the beneficiary’s interests, and to not favor anyone else’s interest, including the fiduciary’s, over that of the client.

Whether or not fiduciary responsibilities have been satisfied is not determined by investment performance, but by whether prudent investment practices and standards were followed. To establish those practices and standards, the preparation of the IPS is one of the most important functions of the RIA. To emphasize its importance, in some SEC districts, SEC auditors are asking to see the IPS for a sampling of client relationships.

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Ips And The Investment Process

The investment process can be seen as occurring in six steps, as described below. Many experts believe that the creation of the IPS is the single most important step in this process. All the other steps either lead into the IPS, or are directed by the IPS.

  • Initial discovery: The initial discussions and sharing of documents that allows both the client and the advisor to learn about one another. On the one hand, this might include learning about the client’s circumstances, goals, income needs, restrictions, current holdings, risk tolerance, etc. The client should also attempt to learn as much as possible about the investment manager’s investment philosophy, practices and procedures.
  • Discussion and agreement: All the issues related to what is to happen between client and advisor should be placed on the table. Where there are questions or a lack of clarity exists, further discussion may be needed. Eventually the client and advisors need to come to agreement on issues such as the degree of client involvement, the asset allocation to be used, the kinds of instruments to be utilized , how tax considerations will be treated, investment goals, needs for liquidity or income, investment restrictions, investment methodology, and responsibilities of each party to the other.
  • Ongoing communication: Meetings, reports and other communications will occur between advisor and client, generally as suggested in the IPS.
  • Creating A Solid Foundation

    One important benefit of a well-crafted investment policy statement is that it can help preserve the relationship between institutions when there is turnover among the individuals involved. Consider a clients board of directors, whose membership changes every few years. The document can act as a guide, helping new individuals quickly get up to speed on investment policies.

    This article is based on the special report, The Importance of an Investment Policy Statement: Putting Practice to Paper, by Suzanne Lindquist and Kyle J. OKeefe. For a copy of the report or more information about Morgan Stanley Wealth Managements dedicated OCIO service, please contact your Morgan Stanley Financial Advisor.

    1 Source notes: March 31, 2021 Capital Markets Assumptions


    Morgan Stanley Wealth Management is the trade name of Morgan Stanley Smith Barney LLC, a registered broker-dealer in the United States.

    The sole purpose of this material is to inform, and it in no way is intended to be an offer or solicitation to purchase or sell any security, other investment or service, or to attract any funds or deposits. Investments mentioned may not be appropriate for all clients. Any product discussed herein may be purchased only after a client has carefully reviewed the offering memorandum and executed the subscription documents.

    Because of their narrow focus, sector investments tend to be more volatile than investments that diversify across many sectors and companies.

    CRC #4044334

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    Defining Objectives And Risk Level

    You must begin by sitting down and becoming honest with yourself about the goals and the objectives. Think about how much risk you want to take on in the investment process. Always make sure that the speculative investments have much higher returns but you are at risk level of losing the capital amount invested.

    The Importance Of Cash Flow

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    Family offices are different from other organisations, in that there is often a greater and more irregular call on the investment portfolio. Family members request funds for business-related or private equity stakes, philanthropic and impact investments, or ongoing expenses. In this respect, being able to model the impact of cash flows on an overall investment portfolio is important, and experience suggests that the focus on yield and cash flow tends to be higher for family offices than for other client types. Accordingly, families should consider their overall liquidity needs carefully during the portfolio construction process.

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    Discovery Unearths Your Financial Goals

    Discovery is the most important step in our investment process. Through a comprehensive discussion with you about your goals and the requirements of the assets, well gain an in-depth understanding of your needs. Well also ascertain your level of acceptance for volatility along with the actual need for that volatility. This gives purpose to the design of the portfolio and, in turn, purpose to the portfolio.

    Negotiating With Financial Advisor:

    One of the first things that you do is sit down with the representative of the firm looking after the assets and talk to them. It is important to learn if they have any kind of internal guidance to their suggested investment proper decision-making process. In these cases, the professional or expert makes transactions on your account for you in other cases, they can act as a legal authority of the account.

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    What Is An Investment Policy Statement

    An investment policy statement describes a clients nancial goals and investment objectives, while documenting the roles and responsibilities of all parties involved in managing portfolios, including the clients outsourced chief investment office , board members, investment committee, investment managers and custodian.

    Once created, an investment policy statement can help contextualize the clients spending outlook. Ultimately, the document enables OCIOs to provide a full suite of investment management, duciary oversight and operations/administrative services, allowing clients to focus on bigger-picture items.

    The Ips And The Advisorclient Relationship

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    The IPS development process lays the foundation for a successful relationship between advisors and clients. An important benefit of utilizing and IPS in clarifying needs, procedures and expectations is that clients have a better understanding of what the advisor is going to do with their money, and of their advisor’s approach. Clients have an opportunity to understand the reasons why each action is to be taken. As a result, clients tend to have more confidence in the advisor’s abilities.

    Having that increased level of understanding and confidence becomes important when markets go through a down period. The IPS establishes investment guidelines and a framework for long-term investment thinking and can help calm nerves when things are particularly volatile.

    • Prudent Investment Practices: A Handbook for Investment Fiduciaries, published by the Foundation for Fiduciary Studies
    • âInvestment Policy: Winning the Losers Game,â Charles Ellis, Irwin Publishing
    • âThe Management of Investment Decisions,â Trone, Albright & Taylor, McGraw-Hill

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    How Does The Investment Policy Statement Work

    The Investment policy is needed under virtually all investors, with the exception of individual investors. The presence of a policy statement assists in efficiently communicates to all the relevant Advisorant parties, the process, investment philosophy, guidelines, and constraint to stick by the other parties. It is seen as a thing from the client to the investment manager about how money is managed.

    But the investment policy statements must provide guidance for all the investment decisions and responsibility of each party. It is a policy document other than an implementation directive, and statements provide guidance for how investment decisions are made and therefore should not be a list of the certain securities to be utilized.

    And the presence of the Investment statements assists in creating an environment of clarity and transparency in the relationship among the client and the advisor. The statements offer the client a better understanding of what you can expect from the advisor. And that clarity usually helps to establish a much higher position of the trusts and respect as it helps assure the investments manager is familiar with the expectation of the client.

    How To Create An Investment Policy Statement

    An IPS helps transition your investment collection to an investment plan.

    Editor’s note: This article originally ran on Oct. 2, 2017. University of Chicago professor Harold Pollack gained some well-deserved attention for his “financial advice on an index card” concept. His basic idea was that a successful financial plan doesnt have to be–and in fact shouldn’t be–overwrought. If you can’t distill the basics onto a 4″x6″ index card, you’re probably overthinking it.

    I urged investors to take up a similar challenge with their investment programs, and sketched out my own as part of this article. But investors can also benefit from fleshing out the parameters of their investment strategies a bit more by crafting investment policy statements. Financial advisors often prepare complicated investment policy statements for their clients, complete with appendixes, footnotes, and legal disclaimers. But yours needn’t be overwrought.

    Rather, at its most basic and useful, the statement documents the parameters of your investment plan: the asset allocation framework, criteria for selecting securities, and the system to maintain those investments on an ongoing basis. Used in conjunction with a master directory, the statement can be an invaluable tool for keeping tabs on your investments. Such documents will also aid your loved ones if, for whatever reason, they need to be able to obtain a quick and thorough overview of your investment plan.

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