The Informed Investor

Importance of a Personal Investment Statement for Investors

Randy A. Garcia, CEO

February 6, 2024

Personal Investment Statement

If you work with an investment advisor or wealth manager, you probably have a financial plan or a personal investment statement.  That’s a vital document, as it creates a roadmap from where you are now to where you want to be.

Funny thing about roadmaps, though. It is incredibly tempting to second-guess the plan at times, especially during stressful periods of economic uncertainty.

We all make plans to reach important goals in life, but we don’t always stick to them. Whether you are planning to lose weight, eat healthier, or exercise more, plans don’t always translate into success. For example, we may be on a roll but get derailed by stress at the office or home.

Like all other plans in life, financial plans are only as good as your commitment to follow them. But just like other plans…it can be hard to stick with the plan when the going gets tough.

That is why your investment advisor will create your personal Investment Policy Statement, also called an “IPS”. It is a critical component of the wealth management strategy because it helps remind investors why they committed to the plan in the first place and what long-term goals they have set. It guides them over whatever rocky roads lay ahead on the stock market or economic front.

I consider this a critical document, and in our decades of helping clients, my firm would never start work without one. However, I know that many people have never even heard of this document.

Sadly, many investment advisors are probably happy to keep it that way.

A survey by Russell Investments found that 61% of advisors do not create Investment Policy Statements for their clients.

Investment Policy What???

Let’s back up. If you employ an investment advisor, they will likely prepare a financial plan for you. That is a good start. As Ben Franklin said, failing to plan is planning to fail.

A good financial plan is a formal document that outlines your financial goals and then creates a road map to achieve them.  Good advisors will create a plan and then regularly stress-test it and help you address any deficiencies that may stop you from achieving your goals. You should come away with a clear and concrete action list to know what actions you need to take and when.

As critical as these financial plans are, the Investment Policy Statement is equally important.

An IPS is a document drafted by your investment advisor but should (absolutely) include your input.  It outlines the rules that you want your advisor to follow:

  • Your risk tolerance and your goals
  • How your assets will be allocated among asset classes
  • What portion of your assets will remain liquid (that is, in cash or equivalents)
  • What your specific long and short-term objectives are

A well-designed IPS provides both your advisor and you with action-oriented guidance. The real goal of the IPS is to keep you, the investor, on track toward your goals, especially during stressful periods of economic volatility.

Why Do Investors Need a Personal IPS?

While investing can seem simple in theory (buy low, sell high), it is anything but. As an investor, you are fighting natural human urges of fear and greed. While things may seem easy and effortless during long bull markets, think back to 2008. A dropping market can be terrifying.

Those are the times when it is very easy to make an emotional mistake.  Plenty of clients want to change direction after a particularly dramatic down day, but those are usually the emotional mistakes we want to avoid most.  Returning to the IPS, your investment advisor can help you take a deep breath and remember your original plan.

Our firm specifically includes provisions where the investor agrees not to change the IPS based on short-term performance.

How many people sold at or near the bottom in 2008….only to miss out on the recovery that followed until it was well underway? That is why we create an IPS for all of our clients.

Simply put, it protects you from yourself. Whenever market volatility drives you temporarily insane, and you’re tempted to ditch the strategy you and your advisor have outlined in your financial plan, the IPS can help you think again.

It also gives you peace of mind. When the markets become volatile, a quick look at your IPS can remind you of the big picture.

All of this is extremely practical.  Our IPS documents protect clients from making an expensive mistake based on something they saw on TV or heard from a friend.

A Personal Investment Policy Protects You from Your Advisor

Another important reason to insist on an IPS is one that most investors don’t even think about. It can also protect you from a problem advisor. How does it do that? First, a good IPS should include strategies, monitoring, and control procedures to be followed by anyone involved in the process of managing your money. If an advisor will over-trade your account or recommend changes not in your best interest, the IPS should call them out…in writing.

By insisting on an IPS, you’ll send a message that your money will be managed formally, not haphazardly. If an advisor won’t agree to develop one for you, that’s a red flag that may have saved you a lot of money and stress. Be thankful for that and walk away.

At ICC, we create an investment policy statement for EVERY CLIENT.  No exceptions. As fiduciary investment advisors, we believe that’s part of the role of putting your interests first.

An IPS is a Trust Document between Your Advisor and You

In times of economic volatility and uncertainty, an Investment Policy Statement lets your advisor remind you of your long-term goals and why you felt it important to include certain investment guidelines in your IPS. On the flip side, clients can hold their advisors accountable, too.  This is critical.  After all, entrusting the management of your money to someone else is a huge deal!  By having an IPS, you have something powerful: assurances in writing. If the advisor deviates, you have proof of your investment guidelines.  Hopefully, you won’t need it, but better safe than sorry.

Insist on an IPS…and a Fiduciary

The beauty of the IPS is that it documents the fiduciary process. That way, there is no skipping an important step for any client. The client also gets a clear view of their goals and objectives, as they are part of the process. Ultimately, they approve the IPS.

Then, later, when the market gets volatile, or they second-guess an investment decision, we can all revisit the IPS. It shifts the perspective from the detail into the big picture mode. It keeps us proactive instead of reactive.

That’s why you should insist on working only with firms that:

  • Act as your fiduciary
  • Always create an investment policy statement for you

If you don’t, you’re potentially at risk. And your financial future is far too important to go down that road.

Learn More About Investment Management with ICC

ICC has over three decades of experience as an independent, Las Vegas-based wealth management firm. It was among the first in southern Nevada to implement the fiduciary standard, which seeks to eliminate or disclose conflicts of interest so our professionals can give their maximum effort to achieving all that is important to you.

If you’d like to learn more about our wealth management services and have $5,000,000 or more in investable assets, contact ICC founder Randy Garcia today at 702-871-8510.


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