Investment Policy Statement (IPS)
An Investment Policy Statement (IPS) is a formal document between an advisor and client that outlines investment objectives, risk tolerance, constraints, asset allocation guidelines, and the rules governing portfolio management decisions.
Exam Tip
IPS constraints = TTLLU (Time, Taxes, Liquidity, Legal, Unique). Risk tolerance: ABILITY (objective) vs WILLINGNESS (subjective). When they conflict, use lower risk tolerance.
What is an IPS?
The IPS is the foundational document for all investment decisions, serving as a roadmap that guides portfolio management.
Key Components
| Component | Description |
|---|---|
| Investment Objectives | Return requirements, growth vs. income |
| Risk Tolerance | Ability and willingness to accept volatility |
| Constraints (TTLLU) | Time, Taxes, Liquidity, Legal, Unique |
| Asset Allocation | Target percentages for each asset class |
| Rebalancing Policy | When and how to realign portfolio |
Risk Tolerance
- Ability (objective): Time horizon, liquidity needs, asset size
- Willingness (subjective): Past experience, emotional reaction to losses
When to Update
- At least annually
- After major life events
- When goals change significantly
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