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An Investment Policy Statement (IPS) sets clear objectives,
defines asset allocation policy, establishes management procedures, and
determines communication procedures related to the managed investments.
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Setting Objectives - An IPS sets clear and definable expectations, risk and
return objectives, and guidelines for the investment of the assets.
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Defining the Asset Allocation Policy - An IPS puts forth a structure and
identify the investment asset classes to use to achieve a diversified
portfolio, as well as to determine how those assets are to be best allocated
toward the achievement of the investor’s objectives.
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Establishing Management Procedures - An IPS provides a guide for selecting,
monitoring, and evaluating the performance of those charged with managing and
investing the assets, as well as making changes as appropriate.
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Determining Communication Procedures - An IPS creates a concise method of
communicating the process and objectives among all parties involved with the
investments, while assigning responsibility for implementation.
It is also worth noting that the typical investor often makes inappropriate
decisions due to a lack of both information and a systematic approach.
Emotional or behavioral factors can also lead to improper decision-making. With
an effective IPS, advisor and client can make prudent, rational decisions about
investments with confidence.
Additionally, each party has a clear record of objectives, concerns,
circumstance and expectations. Thus, the IPS creates a record of why and how
things were done and may provide fiduciaries and investment decision makers
important legal protection should conflicts arise.
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