Investment Policy Statement — Biggest element to consider

In a previous article we explored why investors must have an investment policy statement, which is a unifying statement of financial goals and objectives.

And while this key document concerns itself with net returns after taxes, expenses, fees and inflation, today we are looking at another key function it serves: unifying family direction.

You can think of an investment policy statement as a way to lay down some general ground rules for your wealth manager or financial advisor.

It’s a great way to hold them accountable and ensure you’re reaching your objectives while avoiding financial planning you don’t agree with.

Your investment policy statement will also include things like liquidity requirements, asset allocation, risk tolerance, and other critical information. It’s kind of like a roadmap because it outlines ways to invest successfully.

Focusing on “Hard” Investment Issues

As discussed in our recently published book “The Art Of Protecting Ultra-High Net Worth Portfolios And Estates, Strategies For Families Worth $25 Million to $500 Million”, the Investment Policy Statement also looks at what can be called “hard” investment issues at the family level, compared to “soft” issues (these are typically captured by a family constitution, which seeks solidarity of values and vision).

In the context of unifying families and aligning them as a cohesive investment group vs. a disparate set of individual investors, the Investment Policy Statement outlines mutually acceptable approaches and philosophies regarding:

• Procedures
• Volatility
• Risk
• Liquidity
• Taxes
• Spending
• Unique Circumstances
• Defining Risk Tolerance

In essence, the Investment Policy Statement defines the kind of investment-related decisions that are permitted, and those that are not. Naturally, much of this depends on each family’s risk tolerance. For example, there may be provisions that:

• Advise against short selling
• Exclude ultra-aggressive investments (e.g., commodities, puts and calls)
• Refrain from touching hedge funds
• Are open to exploring venture capital or angel investing
• Encourage “green” investments

It can be helpful for both parties — the family and financial advisor — to see a visual guide outlining their overall plan to capitalize on the wealth of the investor.

With this in mind, in any family there are differences of opinion and varying agendas. As we all know, sometimes these viewpoints are not based on objective information or investment strategy best practices.

For example, one family member may want to invest in a particular hedge fund because the child of a business partner or close friend works there.

Obviously, the Investment Policy Statement is not a magic wand, and there is no way to prevent these types of issues from arising.

However, if the document is properly developed and regularly updated, then it can provide valuable guidance on how to resolve issues effectively and intelligently, and in a manner that maintains family unity.

Advising the Advisors

It is not just family members who can have different views — professional financial advisors can disagree as well. The Investment Policy Statement can thus serve to direct the investment path for these advisors, so they can align their counsel with the established direction and desires of the family, who they are duty-bound to serve.

Functional, but Flexible

The above discussion on the importance of a functional Investment Policy Statement should not suggest that the document is carved in stone. Yes, it must be robust and firm to be useful. Yet at the same time, it should be flexible enough to allow for diverse interpretation, while appropriately restricting the scope of debate.

In this sense, family members are empowered to offer perspectives and share ideas that may ultimately end up changing investment decisions and strategies.

The Bottom Line

Investing at any level must not be haphazard, but this wisdom takes on an added significance for ultra-high net worth families, because wealth that has taken decades or generations to build can be wiped out with shocking speed.

Simply put, a solid Investment Policy Statement helps families appreciate that investing is a discipline, and gives them the robust framework they need to guide portfolio and wealth management approaches and philosophies.

Although many investors don’t ever create a solid investment policy statement, it’s a good idea if you like the idea of having a way to hold yourself and your advisor accountable while being able to view a visual roadmap of where you’d like to be with future investments.

Make sure your current advisor is familiar with investment policy statements of course, but also with your family and legacy. If you’re in need of a top wealth manager, don’t let that fact stress you out. There are plenty of competent financial advisors in Naples, Florida, who are ready to help take your wealth to the next level and answer any questions you might have.