OTTAWA -- Big pension funds use investment policy statements to help guide their portfolios, but even though you aren't managing billions, advisers say you probably should use one too.
A formal investment policy statement is not a financial plan, but should be complementary to one.
Ilana Schonwetter, an investment adviser at BlueShore Financial in North Vancouver, B.C., says an investment policy statement should outline your overall objectives, while a financial plan handles the details of achieving those goals.
"To me it makes sure that my clients actually understand everything that we have discussed," Schonwetter says.
"This is the point at which you can reconfirm that you're both on the same page as far as some very key important factors that will help your relationship move forward."
A formal investment policy should lay out why you are investing and your expected time horizon.
It should provide guidance about how money will be invested, including what kinds of investments it will hold and outline what mix of stocks and bonds you are comfortable with.
It should reflect any discussions you have had with your adviser about the level of risk you are willing to take and what may or may not be a suitable investment.
Are you comfortable with investing in individual stocks or would you rather hold mutual funds? Are junk bonds OK or do you want to only hold investment-grade debt? The policy should set out where your money can go.
A policy should also outline your expectations from your adviser and what you are going to pay for their services. Things like how often you expect to meet with your adviser and what kind of communications you expect to receive should be set out.
An investment policy can also be where you identify any restrictions on investments you may want to include, such as socially responsible investment principals.
"The investment policy statement to me can go beyond just the objective and the goal. It can reflect the client's personal values and make sure that we are really tapping into what is important to that client," Schonwetter says.
Sylvain Brisebrois, a portfolio manager and regional manager at BMO Nesbitt Burns, said an investment policy can be used to help keep you on track when markets are volatile.
"When the markets are going quickly to the upside and we become a little bit braver in terms of our allowable risk tolerance, this is a document we can refer to to make sure we don't deviate from our longer-term understanding," he said.
"The flip side also true. When the markets are difficult, sometimes we want to refer back to the IPS."
Brisebrois compared a formal policy with having a road map to help guide your investing.
"If you take off without having really planned where you're heading, sometimes you need to readjust and it could slow you down," he said.
He says he reviews the investment policy with his clients annually, but changes only need to be made when the circumstances require them.
Brisebrois says investment policies aren't an absolute necessity, but even investors with small portfolios should consider them.
"The bigger the portfolio, the more customized it might become. Much like a will," he said.
"As the needs of an investment plan become a little bit more detailed, then the IPS takes on a little bit more structure."
