For any organization with a board or investment committee, getting everyone on the same page is half the battle. An Investment Policy Statement (IPS) is the ultimate alignment tool. It’s a shared playbook that aligns every decision-maker—from board members to financial advisors—around a single, unified strategy. This document clarifies roles, defines responsibilities, and establishes the benchmarks for success, leaving no room for ambiguity. The collaborative process of investment policy statement creation builds consensus and ensures that every stakeholder understands and agrees upon the mission, goals, and rules of the road. It transforms a collection of individual opinions into a cohesive and accountable governance structure, preventing future conflicts and keeping the entire team focused.
Key Takeaways
- Establish a Clear Financial Roadmap: An IPS serves as the foundational guide for your investment strategy, aligning all stakeholders and ensuring every decision is made with a clear, mission-driven purpose.
- Define Your Specific Rules of Engagement: A truly effective IPS avoids generic language by clearly outlining your unique financial goals, risk tolerance, asset allocation, and performance benchmarks, turning it into a practical tool for decision-making.
- Commit to Ongoing Maintenance: Your IPS is a living document that requires regular reviews to remain effective; adapt it over time to reflect organizational shifts and changing market conditions, ensuring its continued relevance.
What Is an Investment Policy Statement (and Why Do You Need One)?
Think of an Investment Policy Statement (IPS) as the strategic roadmap for your financial future. It’s a formal document that not only outlines your investment goals but also establishes the specific strategies you’ll use to reach them. Creating an IPS is a foundational step that brings clarity and discipline to your investment process, ensuring that every decision is aligned with your long-term objectives.
This document serves as a guide for you and your financial partners, creating a shared understanding of your mission, risk tolerance, and performance expectations. It’s not just about picking investments; it’s about building a resilient framework that can withstand market shifts and keep everyone accountable. By putting these guidelines in writing, you create a powerful tool for consistent, thoughtful decision-making that supports your financial well-being for years to come.
Define: Investment Policy Statement (IPS)
An Investment Policy Statement (IPS) is a crucial document that formalizes your organization’s investment strategy. It clearly states your financial goals and the principles that will guide your investment decisions. Think of it as the constitution for your portfolio. This document is the starting point for how you will use your assets to achieve your mission, whether that involves funding charitable giving or securing long-term growth. An effective IPS provides a clear framework for making choices, especially when markets are unpredictable. It’s a living document, approved by your board or key stakeholders, that ensures everyone involved is on the same page about your investment philosophy and objectives.
The Purpose of an IPS in Your Investment Strategy
The primary purpose of an IPS is to instill discipline and provide clear direction. It acts as a steady hand, guiding your organization through the inevitable ups and downs of the market. During periods of volatility, an IPS helps prevent reactive, emotional decisions by reminding fiduciaries of the long-term strategy. A well-crafted statement promotes strong investment governance, which is essential for achieving better results over time. It establishes a clear process for monitoring performance, selecting managers, and making adjustments, ensuring that all actions are deliberate and aligned with your ultimate goals. This structure not only protects your assets but also builds confidence among stakeholders that there is a thoughtful plan in place.
Common Misconceptions to Avoid
One of the biggest misconceptions is that strong investment performance alone will protect fiduciaries from legal challenges. In reality, lawsuits often focus on whether fiduciaries followed the process outlined in their IPS, not just on the returns they generated. Adherence to the documented strategy is key. Another common mistake is using generic, boilerplate language copied from another institution. Your IPS should be a reflection of your organization’s unique circumstances, mission, and risk tolerance. A policy that isn’t tailored to your specific needs fails to provide meaningful guidance and can lead to poor decision-making. Taking the time to create a customized IPS is a critical step in fulfilling your fiduciary responsibilities.
What Are the Key Components of an Effective IPS?
Think of an Investment Policy Statement as the business plan for your investment portfolio. It’s a living document that outlines the rules of the road, ensuring every decision is made with purpose and aligns with your long-term vision. A well-crafted IPS provides clarity, enforces discipline, and creates a framework for making sound financial choices, especially when markets get choppy. It’s not just a formality; it’s the foundation of a successful investment strategy.
By breaking it down into its core components, you can build a comprehensive and practical guide. Each section addresses a critical question about your investment goals, your tolerance for risk, and the logistics of managing your portfolio. Getting these details down on paper helps align all stakeholders—from family members to board members and financial advisors—and establishes a clear path forward. Let’s walk through the essential elements every effective IPS should include.
Your Organization’s Background and Objectives
This is where you tell your story. Start by outlining your organization’s mission, history, and core values. What is the fundamental purpose of this pool of capital? An IPS should act as a roadmap for your investment strategy, so it’s essential to first define the destination. Clearly state your financial objectives, whether they are to fund specific programs, preserve capital for future generations, or achieve a certain level of growth to support operations. This section sets the context for every decision that follows, connecting your financial strategy directly to your overarching mission and giving goals.
Risk Tolerance and Asset Allocation Strategy
Here, you’ll define your relationship with risk. It’s a two-part conversation: how much risk are you willing to take (your risk appetite), and how much are you able to take without jeopardizing your goals (your risk capacity)? Answering these questions helps you establish a suitable asset allocation strategy—the mix of stocks, bonds, and other investments in your portfolio. You should also define your return expectations and time horizon. Are you investing for the next five years or the next fifty? The answers will shape a portfolio designed to meet your specific needs.
Roles, Responsibilities, and Performance Benchmarks
This section clarifies who does what. A successful investment strategy requires clear lines of authority and accountability. You should explicitly name the individuals or committees responsible for key tasks, such as approving the IPS, selecting investment managers, and executing trades. It’s also crucial to establish how you’ll measure success. Define the benchmarks—like specific market indexes—that you’ll use to evaluate performance. This creates an objective standard for assessing your strategy and holding your investment professionals accountable for the results.
Spending Policy and Liquidity Needs
How will you use the money you earn? A spending policy outlines the guidelines for withdrawals from the portfolio. For example, a foundation might decide to spend 5% of its assets annually. If you don’t have a formal spending policy, creating one should be a priority. This section should also address your liquidity needs—the amount of cash or easily accessible funds you need to have on hand to cover short-term expenses. Properly planning for these needs ensures you won’t be forced to sell long-term investments at an inopportune time to meet immediate obligations.
Compliance and Governance Structure
Finally, this component formalizes the rules and procedures that govern your investment program. It serves as a strategic guide for how decisions are made, how conflicts of interest are managed, and how the IPS itself will be reviewed and updated. This section should detail the schedule for regular reviews—typically annually—to ensure the policy remains relevant as your organization evolves and market conditions change. Establishing a strong governance structure provides a framework for disciplined decision-making and helps ensure the long-term integrity and success of your investment strategy.
How to Define Your Investment Goals and Risk Tolerance
Before you can build a roadmap, you need to know your destination. Defining your organization’s investment goals and comfort with risk is the most critical step in creating a useful Investment Policy Statement. This process clarifies your purpose and sets the foundation for every decision that follows, ensuring your financial strategy is built to last.
Assess Your Organization’s Financial Objectives
Start by getting back to basics: What is the money for? Your organization’s mission should be the driving force behind its financial objectives. As Bank of America notes, the core principle is that “money serves mission.” Clearly articulate what the endowment or investment portfolio is meant to achieve. Is it intended to fund specific programs, generate stable income for operations, or grow over the long term to support future initiatives? Writing down these goals provides a clear benchmark against which you can measure the success of your investment strategy and ensures everyone involved is working toward the same outcome.
Evaluate Your Risk Capacity and Appetite
Understanding risk is about more than just numbers; it’s about knowing your organization’s limits. It’s helpful to think about risk in two ways: capacity and appetite. Risk capacity is the amount of financial loss your organization can withstand without jeopardizing its mission. Risk appetite is the level of risk your board or stakeholders are comfortable taking on. These two things aren’t always the same. A frank discussion about how much volatility your organization can handle is essential for setting realistic expectations and building a resilient portfolio that lets everyone sleep at night.
Align Your Investment Strategy with Your Mission
Your IPS acts as a roadmap, connecting your daily investment decisions to your organization’s ultimate purpose. Every choice—from asset allocation to selecting an investment manager—should directly support your mission. If your objective is to provide stable funding for annual grants, a highly aggressive, volatile strategy probably isn’t the right fit. By explicitly linking your strategy to your mission, you create a powerful filter for making decisions. This alignment ensures your financial resources are always working to advance the goals that matter most to your clients and stakeholders.
Factor in Your Time Horizon and Liquidity
Your time horizon—how long you plan to invest—is a key factor in shaping your strategy. A foundation planning to operate for generations can generally take on more risk than one with short-term funding goals. Many organizations plan around a five- to ten-year horizon. At the same time, you must address your liquidity needs. It’s crucial to maintain enough cash or easily accessible assets to cover operational expenses, grant payments, and unexpected costs. Balancing long-term growth ambitions with short-term cash flow requirements prevents you from having to sell assets at the wrong time.
How to Create Your Investment Policy Statement, Step-by-Step
Creating your Investment Policy Statement is a foundational step toward disciplined investing. Think of it less as a rigid set of rules and more as a strategic roadmap that guides your financial decisions, keeps everyone aligned, and provides a framework for measuring success. This document is essential for any organization, from nonprofits to family offices, because it translates your mission into a tangible investment plan. It acts as a critical communication tool between the board, management, and your investment advisors, ensuring everyone is working from the same playbook. While it requires thoughtful consideration upfront, the process itself is straightforward and brings immense clarity to your financial governance. By following these steps, you can develop a comprehensive IPS that reflects your organization’s unique objectives and ensures your investment strategy remains purposeful and on track. It’s the key to making consistent, mission-aligned decisions, even when markets are volatile. Let’s walk through how to build one from the ground up, creating a document that will serve as your organization’s financial north star.
Step 1: Engage Stakeholders and Set Goals
Your first move is to bring all key players to the table. This includes your staff, board members, and any outside advisors. Creating an IPS is a team effort, and its success depends on shared understanding and buy-in from the start. The goal of this initial phase is to get on the same page about your organization’s core mission and how your investments will support it. This collaborative process ensures that the financial strategy is directly tied to your overarching purpose, creating a solid foundation for every decision that follows. It’s about building a consensus that will guide your entire investment approach and keep everyone focused on the same long-term objectives.
Step 2: Draft and Document the Policy
Once your goals are clear, it’s time to formalize them in a written document. Your IPS serves as the official roadmap for managing your organization’s assets. Start by clearly stating the purpose of the investment fund—why does it exist? Then, define the purpose of the IPS itself. This section should outline how the document will help the board fulfill its duties, establish investment goals, assign roles, and create a clear process for making decisions. Think of this as the constitution for your investment strategy; it should be clear, concise, and accessible to everyone involved. This written record is what you’ll turn to for guidance and clarity when making important financial choices.
Step 3: Review, Approve, and Implement
An IPS isn’t a document you create once and file away. To remain effective, it needs to be a living part of your governance process. You should plan to review and update your IPS at least once a year. This regular check-in ensures the policy stays relevant as your organization evolves and market conditions change. After your team formally approves the document, the next step is implementation—putting the plan into action. Many organizations find it helpful to work with financial experts to create and manage this document, ensuring it aligns with best practices and continues to serve your goals effectively over time.
Establish Clear Decision-Making Authority
Ambiguity is the enemy of a good investment strategy. Your IPS must clearly define who is responsible for what. This means explicitly assigning authority for key tasks to specific individuals or committees. You’ll want to outline who has the power to review and approve the IPS, determine investment objectives, set the asset allocation, select investment managers, and execute trades. By detailing these roles and responsibilities, you create a system of accountability and transparency. This clarity prevents confusion down the line and ensures that every part of the investment process is handled by the right people at the right time, which is crucial for maintaining discipline and focus.
Common Pitfalls in IPS Development (and How to Avoid Them)
Crafting a solid Investment Policy Statement is a huge step forward, but a few common tripwires can undermine its effectiveness. A well-intentioned but poorly constructed IPS can create more confusion than clarity. The good news is that these mistakes are entirely avoidable with a bit of foresight. By understanding where others have stumbled, you can create a document that is clear, actionable, and truly serves your financial goals. Let’s walk through the most frequent pitfalls and discuss how you can sidestep them.
Achieving Stakeholder Consensus
One of the biggest hurdles isn’t financial—it’s human. An IPS developed in a silo is destined to fail. If key decision-makers aren’t involved in its creation, they won’t feel a sense of ownership or be fully aligned with its principles. The process of building the IPS is as important as the final document. It forces critical conversations and ensures everyone, from the board to your investment advisors, understands the mission and how the investment strategy supports it. Take the time upfront to gather input and secure buy-in from all relevant parties. This initial investment of time prevents significant friction and misalignment down the road.
Balancing Flexibility with Clear Guidelines
Your IPS should be a guide, not a straitjacket. A common mistake is creating a document that is either too rigid to adapt to changing market conditions or too loose to provide meaningful direction. The goal is to find the sweet spot. The policy needs firm, clear guidelines on core principles like asset allocation ranges and risk tolerance. However, it should also allow for tactical adjustments. To keep it relevant, you can’t just “set it and forget it.” Your IPS is a living document that should be reviewed at least annually to ensure it still aligns with your organization’s objectives and the current economic landscape.
Avoiding Vague, Generic Language
It can be tempting to pull a template off the internet and call it a day, but this approach often leads to an IPS filled with generic, boilerplate language. A policy that isn’t specific to your organization’s unique circumstances, goals, and constraints is of little practical use. For example, simply stating a goal of “capital appreciation” is too vague. Instead, specify the target rate of return and the time horizon for achieving it. Every section, from your spending policy to your performance benchmarks, should be tailored to reflect your reality. This customization is what transforms an IPS from a simple compliance document into a strategic tool for your clients.
Managing Complex Options and Setting Realistic Expectations
A strong investment process is your best defense. Many assume that strong performance will shield them from scrutiny, but in reality, a fiduciary’s decision-making process is often more important than the outcome. Lawsuits and disputes frequently challenge the process by which decisions were made, not just the investment returns. Your IPS is the primary evidence of that prudent process. It should clearly document how investment decisions are made, who is responsible, and how performance is monitored. This creates a defensible, repeatable framework that protects fiduciaries and sets clear, realistic expectations for everyone involved.
How to Maintain Your IPS Over Time
Creating an Investment Policy Statement is a significant achievement, but its real value comes from its continued use and relevance. Think of your IPS not as a static document filed away in a drawer, but as a living guide that evolves with your organization. An outdated IPS can be just as unhelpful as having no IPS at all. To keep it effective, you need a clear process for maintaining it. This involves regular check-ins to confirm it still reflects your goals, holds your strategy accountable, and adapts to new circumstances. An IPS is not a static document; it should be reviewed regularly to ensure it remains aligned with your mission. By committing to ongoing maintenance, you ensure your IPS remains a powerful tool for disciplined and mission-aligned investing for years to come. This proactive approach helps all clients stay focused on their long-term objectives, even as internal priorities or external markets shift. The following steps will help you build a simple yet robust process for keeping your IPS current and effective, turning it from a one-time project into an integral part of your governance framework.
Establish a Regular Review Schedule
One of the most common mistakes is to “set and forget” an IPS. To prevent your policy from becoming obsolete, it’s essential to establish a consistent review cadence. For most organizations, an annual review is a great starting point. Schedule a dedicated meeting with your investment committee, board members, and financial advisor to read through the document together. This yearly check-in ensures the IPS stays relevant and effective, allowing you to formally ratify its contents or identify areas that need updating. This simple habit keeps the policy top-of-mind and reinforces its importance as your financial north star.
Monitor Performance and Ensure Compliance
Your IPS is your primary tool for accountability. It outlines the benchmarks and metrics for measuring success, making it the definitive yardstick for your investment performance. During your regular reviews, compare your portfolio’s results against the targets defined in the policy. This process isn’t just about the numbers; it’s about confirming that all investment decisions made throughout the year were consistent with the established guidelines. The IPS acts as a guiding force, making sure everyone is on the same page and that your investment strategy directly supports your organization’s long-term mission and goals.
Adapt to Organizational and Market Changes
The world isn’t static, and neither is your organization. An IPS must be flexible enough to adapt to both internal and external shifts. Significant organizational changes—like a new executive director, a major capital campaign, or an updated strategic plan—should automatically trigger a review of your IPS. Likewise, major market shifts or changes in the economic environment may require you to revisit your asset allocation or risk tolerance. The goal isn’t to react to every market fluctuation, but to thoughtfully consider whether foundational changes merit an update to your long-term policy.
Partner with Your Investment Professionals
You don’t have to manage your IPS in a vacuum. Working with trusted financial professionals can bring invaluable perspective to the review process. An outside advisor can offer an objective view of your policy, facilitate productive conversations among stakeholders, and help translate your organization’s evolving goals into specific, actionable language within the document. They can also provide critical insights on market conditions and help you stress-test your policy against various economic scenarios. This partnership ensures your IPS is not only well-drafted but also resilient and practical.
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Frequently Asked Questions
Is an IPS just for large organizations, or do individuals need one too? While the language often focuses on organizations like foundations or endowments, the principles of an IPS are incredibly valuable for individuals and families as well. It serves the same purpose: to create a clear roadmap for your investments, establish rules for decision-making, and keep you focused on your long-term goals. For an individual, it can be a powerful tool to align investments with personal milestones, like retirement or funding an education, and prevent emotional reactions to market swings.
How is an IPS different from a standard financial plan? Think of it this way: a financial plan is the big-picture map of your entire financial life, covering everything from budgeting and insurance to estate planning. An Investment Policy Statement is a more focused document that acts as the detailed operating manual specifically for your investment portfolio. It drills down into the nitty-gritty of your investment strategy, defining your risk tolerance, asset allocation, and the rules for managing your assets, providing a level of detail that a broader financial plan typically doesn’t.
How often should we update our IPS outside of the annual review? The annual review is your scheduled maintenance, but certain events should trigger an immediate check-in. Think of major life or organizational changes as the catalyst. This could include a significant shift in your financial situation, a change in leadership or board members, new long-term goals, or a major adjustment to your spending needs. The goal isn’t to react to short-term market news, but to ensure your policy remains aligned with any fundamental changes to your mission or circumstances.
Can we create an IPS on our own, or should we work with a professional? You can certainly draft an IPS on your own, and doing so is far better than having none at all. The process itself forces important conversations about your goals and risk tolerance. However, working with a financial professional can bring a valuable outside perspective. An advisor can help you stress-test your assumptions, ensure your policy aligns with industry best practices, and facilitate discussions to build consensus among all stakeholders, which is often one of the trickiest parts of the process.
What’s the most common reason an IPS fails to be effective? The most common pitfall is treating the IPS as a one-time task. An IPS fails when it’s created, filed away, and forgotten. Its power comes from being a living document that actively guides decisions. This often happens when there isn’t true buy-in from all the key stakeholders from the start. If the people responsible for the investments don’t feel a sense of ownership over the policy, they are far less likely to consult it, especially during stressful market periods when it’s needed most.