Investment Policy Statement: Return

Posted By: Advisor Analyzer Team

If we were to compare the financial profile and investment policy statement to a cross country road trip, the profile would provide more situational information. The type of car you will be driving, the final destination, the number of people who will be traveling and so forth. While the investor’s financial profile provides mostly qualitative descriptions, the IPS contains more quantitative forward looking information. The Investment policy statement would be the highways and roads (directions), the cost of fuel and resting, the number of miles traveled, site seeing detours, etc.

 

The Investment Policy Statement (IPS) is a set of guidelines that dictate the investor’s portfolio allocations. The IPS helps advisors determine the least and most suitable investments and detail an investor’s investment objectives and constraints. Specifically, the IPS contains: return and risk objectives, as well as liquidity, legal, time horizon, tax and other unique constraints.

 

Objectives: Required Return Objectives

 

Required Returns are those that are necessary for an investor to meet their long term financial objectives. The returns are essential for meeting the portion of an investor's spending requirements that are to be satisfied with the portfolio. Usually, the required return is stated as a minimal annual percentage (i.e. 6% annually) that's needed to meet all long term expenses and objectives.

 

Objectives: Desired Return Objectives

 

Desired returns are usually returns that are associated with non-primary goals. These objectives are often met only after all required returns are sufficiently met. Objectives such as luxury purchases, travel destinations, a second home etc.. are categorized under desired returns. Failure to meet desired returns are inconsequential.

 

Conclusion

 

The main factor that determines an investor’s return objectives is growth and spending requirements. Usually, the growth component is met through capital gains and the spending needs are satisfied via the income component. When a client’s income is more than enough to meet their spending needs, an advisor can focus on addressing longer term growth objectives and desired return objectives.