Guest Column: Investment policy statements map key portfolio goals

Now take that statement and apply it to an investment plan. An investment policy statement is a document that simply puts investment goals and objectives on paper.

The academics have researched and studied the importance of investment policies and suggest that these statements play a large role in account performance.

A simple Internet search for “investment policy statements” will result in pulling many policies for large institutions, including foundations. Large institutions with a lot of money have been using investment policies for years. Yet it is amazing how many portfolios don’t have written policies and how many investors have never been advised to write one.

Constructing a policy is relatively simple. The purpose is to inform all of the account’s interested parties (including the owner, investment managers and accountants) of the goals, objectives and constraints of the account. It is the business plan of the account – an essential tool for directing and communicating the activities of the portfolio while establishing clear expectations.

Among the details that may be included:

• long-term goals and objectives;

• appropriate risk/return profile for the account;

• definition of a prudent investment process;

• rules and responsibilities of interested and involved parties;

• proper monitoring and evaluation of the portfolio; and

• constraints of the portfolio such as tax, legal or liquidity issues.

The policy should be detailed enough that it creates discipline and avoids unnecessary differences of opinion, but flexible enough that advisers can add value to the portfolio.

The benefits investment policy statements outweigh any inconveniences of writing them. One of the keys to successful investing is having discipline. Investors who avoid “heat-of-the-moment” decisions and reactions will be ahead of the pack. Discipline is a key result of having investment policy statements in place.

Another benefit is clear communication. Unfortunately, miscommunication is not uncommon and can occur for anyone at any time if proper measures are not implemented. Avoiding miscommunication will bring better results for all parties involved.

It is important to note that investment polices are not always optional. The law clearly states that investment policies are required when fiduciaries – persons who have the legal responsibility for managing someone else’s money – are involved. Therefore, investment committees for retirement plans, investment advisers, consultants and trustees of private trusts all are required to establish investment policies.

As an investor, it’s important to remember the importance of why there is a need for an investment policy. It’s there to ensure that financial objectives are met. Investors need to be involved in their policies – not only when writing them, but in using them to oversee the ongoing activity of their portfolios.

Financial advisers can only take on part of the role of writing a policy; they can assist individuals with identifying and clarifying their goals and objectives. The portfolio owner fills in the other part of the equation.

Unfortunately, it is not uncommon to find individual investors who spend more time and effort analyzing the purchase of a $1,000 television than they spend on assessing the goals and objectives of their portfolios. Individuals must be involved, and if they become confused along the way, they need to know that it’s perfectly acceptable to stop and ask lots of questions.

An investment policy may merely sound like more paperwork, but it is an important part of the investment process. It can be surprising how something so simple can improve a portfolio’s performance.

Matt Connell is a vice president and financial adviser for UMB Bank’s Investment and Wealth Management division in Springfield. Matt may be contacted via email at matthew.connell@umb.com.[[In-content Ad]]