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How an Investment Policy Statement Can Guide Effective Decision Making

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An investment policy statement (IPS) is a critical tool in defining family office investment objectives and setting investment parameters.

A well-crafted IPS will do more than provide guardrails around individual investment choices: It will bring the family’s mission to life, serving as a comprehensive element of governance that aligns and documents investment policy in support of family office decision-making.

“Family offices have access to an enormous range of tools for meeting their principals’ objectives,” says Northern Trust Practice Executive for Family Office Investments Trish Halper. “An IPS serves as a rudder, directing the family office along the right course and providing opportunities for adjustment as circumstances change.”

Understanding investment policy statements

An IPS provides the family office with strategic direction, establishes how decision-making occurs, ensures there is clarity around individuals’ roles and creates a blueprint for ensuring objectives are met. As a formal legal document or a more informal statement of investment philosophy, it establishes parameters that guide the investment committee’s decision-making process.

Each IPS is uniquely crafted to meet the specific needs of an individual family. There is no one-size-fits-all. An IPS is typically drafted by investment professionals like those at Northern Trust, in close consultation with their clients. They will guide family members through a process of uncovering their interests, needs and expectations, while providing expertise about how the IPS can be effectively shaped and executed.

That said, an IPS should include several key elements to provide the clear guidance required for investment decisions. Specifically, the IPS should:

  • Describe the family’s investment objectives and risk tolerance, including the investment committee’s purpose and scope.
  • Establish investment parameters, such as a strategic asset allocation framework and any limits on individual positions or market exposures.
  • Define responsibilities, authority, and committee structures.
  • Set policies for portfolio rebalancing and spending.
  • Establish standards for benchmarking portfolio performance.

A well-crafted IPS helps prevent misunderstandings and conflicts

Different risk tolerances among individual investment committee members — and among the generations that serve on committees — can affect what are viewed as appropriate or inappropriate investments. Younger members might be more comfortable than those nearing retirement with the risk of short-term losses for the chance of long-term gain, for example.

The process of drafting or updating an IPS allows family members to voice their opinions and discuss how those views should be actuated through family office investment policy. An IPS articulates investment goals and standards, serving as a unifying voice of the family’s primary intentions and portfolio mission. This set of guidelines then paves the way toward more strategic and transparent decision making, where everyone understands the office’s direction and why choices are being made. It also serves as a resource to direct and coordinate investment consultants and can guide discussions about pooled investments family members may want to pursue.

The process of developing or regularly updating an IPS is also a chance to manage expectations around market outlook and its potential impact on the family office’s short- and long-term investment goals. And because the IPS articulates desired outcomes and sets benchmarks, progress is specific and measurable — another factor that may be helpful in working with investment consultants.

A tool providing both flexibility and boundaries

By their nature, family offices tend to be largely unconstrained investors with little outside interference. This characteristic gives the family office team substantial flexibility in managing portfolios, which can allow them to pursue asset allocation models with a bit of experimentation built in.

When such flexibility is built into the IPS, it creates room to accommodate family members’ niche investment interests without jeopardizing the portfolio’s overall goals. There’s space for different investments, whether family members are excited by the potential of AI, intrigued about an opportunity in fine art or focused on how family funds might help address climate change.

Create a living document that evolves to fit decision-making goals

While an IPS may have certain evergreen parts, it typically evolves to describe what success means in designing the family office’s investment portfolio at a given point in time. Market conditions can change — sometimes radically — and the circumstances of family members themselves will evolve. Best practice calls for reviewing the IPS annually to revisit asset allocation, portfolio construction and governance, as well as shifting family needs and changing market conditions.

Through its iterative, inclusive process, an IPS helps lay the foundation of the family office’s governance structure, identify risk tolerances, and manage expectations, all of which helps align a family’s current and future strategy and decision making.

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Disclosures

This information is not intended to be and should not be treated as legal, investment, accounting or tax advice and is for informational purposes only. Readers, including professionals, should under no circumstances rely upon this information as a substitute for their own research or for obtaining specific legal, accounting or tax advice from their own counsel.  All information discussed herein is current only as of the date appearing in this material and is subject to change at any time without notice.

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