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Investment Policy Statement: definition and its importance

2021.9.10 Vítor Ribeiro, CFA

IPS is an acronym for Investment Policy Statement. It is an investment policy declaration, a strategic guide on how to invest money, how to schedule and implement an investment plan.

The purpose is to help investors make better investment decisions to achieve their goals, which means taking into account a wide range of priorities and concerns, in addition to the performance of the investment portfolio.

To define an investment strategy, there is all the prior work of knowledge and customization in a global context that materializes in the Financial Plan.

We are used to analyzing an investment policy statement in the context of an ETF, an investment fund or a Retirement Savings Plan. We usually associate this need to plan and systematize an investment strategy and guide only to professional investors, high net worth investors (HNWI) or institutional investors such as foundations, banks, pension funds, among others.

But it's not like that. Every investor must have their IPS.

Setting goals makes investors less likely to react to market changes. We believe that if we are working towards a goal or objective, and not seeking returns to beat the market or a benchmark, emotional and hasty decision-making substantially reduces.

The investment policy statement is also the document that will guide the entire advisory process and the relationship between the investor and financial intermediaries. And in this context we can establish a set of essential policies and guidelines. Basically, IPS reveals what you should expect from your financial advisor:

  • Demonstrate knowledge of the investor's financial objectives and characteristics;
  • Always maintain a systematic and consistent approach to counseling;
  • Comply with investor expectations regarding the investment plan. Communicate regularly and effectively and taking into account what the investor expects;
  • Ensure benefits for both parties. A satisfied investor helps the advisor to best practice;
  • Recognize that financial advice cannot have a standard format and that it must respond to the unique characteristics of each person, family or organization.



IPS is not a closed document. It is a unique statement of principle, a completely personalized document, oriented to the preferences, attitudes and situations of each investor. We can follow a script or a draft, but we must focus on the investor's goals, restrictions, tolerances and preferences for the document to be truly useful.

Thus, in a generalist approach, the document may contain the following parts:

  • Scope and purpose
  • Identification of those responsible for the process
  • Investment, profitability and risk objectives
  • Risk management


  • Scope and purpose

This section describes the investor. Useful information, such as personal and professional situation, sources and size of assets, whether you are an individual investor, family or an organization/company.

It is also at this time that the assets that will be managed and targeted for advice via this IPS are defined. In fact, the investor may have more than one IPS because often the investment objectives are multiple.

It is also part of the scope and purpose to define the structure and the different actors in the asset management process.

In the case of the structure, we must take into account the limits to the discretionary nature of property management, whether there is a mandate or not. The investor himself may want to have decision-making power and even the last word in the investment decision, while defining the rules for reception and transmission of orders or the scope of investment advice.

In relation to the different actors involved in management, the investor can define the risk management structure, who will be responsible for monitoring and reporting and even who will assist in the preparation of the IPS.


  • Assignment of responsibilities

The investment process essentially goes through three phases: planning, execution and monitoring.

In this part of the IPS, responsibilities are assigned to who will develop the strategy and investment plan, who are the entities that will execute the strategy and then who is responsible for monitoring the results and implementation of the IPS.

This is also where the rules for updating and revising the IPS are defined.


  • Investment, profitability and risk objectives

Setting goals makes investors less likely to react to market changes. If we are working towards a goal or objective rather than seeking returns to beat the market or a benchmark, emotional and hasty decision-making is substantially reduced.

Therefore, the specification of investment objectives, the required and desired return and the risk must be done with care.

The objectives must be related to future financial needs, whether in terms of expenditure or in terms of the distribution or donation of assets.

The IPS must also describe the investor's risk tolerance.

For individual investors, assessing risk tolerance can be difficult and subjective. The issue of investor errors and biases, as well as the ability and willingness to take risk must be well evaluated.

Finally, the main preferences, restrictions and constraints that may affect the investor and its investment program must be described. From the outset, the investment time horizon, liquidity needs, tax and legal considerations, as well as unique situations and investment restrictions (in certain assets, currencies, regions or instruments, for example).

In this section, the investment philosophy should be well reflected not only at the strategic level, but also at the tactical level.


  • Risk management

The risk management policy refers to the establishment of performance and reporting measures. Risk and performance assessment measures appropriate to the investment strategy to be implemented must be defined.

The rebalancing process is also described in this section, defining the levels of deviation from the defined target and the periodicity of this rebalancing.



Future-proofing each investor's assets is IPS' raison d'être. Understanding our behavior as investors, the reasons for investing, separating the noise from information and understanding the functioning of the financial industry are more than enough reasons to define your Investment Policy Statement today.

Vítor Ribeiro, CFA
Vítor Ribeiro, CFA

Vítor is a CFA® charterholder, entrepreneur, music lover and with a dream of building a true investment and financial planning ecosystem at the service of families and organizations.

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