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Investment policy statements: A trustee’s GPS

May 23, 2024 Article 2 min read
Rockwell Gust IV Wealth Management
Is your trustee making investment decisions without a formal investment policy statement? If so, your trust assets may be exposed to unnecessary risks and suboptimal returns. Here’s how an IPS can help guide the way.
Financial advisor talking to their client about investment policy statements.Investors, like all of us, are emotional creatures. We’re swayed by headlines, influenced by market noise, and prone to making impulsive decisions.

The brain is wired for shortcuts, and investors seek information that aligns with their existing beliefs. When markets soar, investors tend to get overconfident — when they plummet, they panic. They chase hot tips and follow the herd. They give undue weight to recent events. They fear losses more than they value gains. “This time is different,” they tell themselves. But history instructs otherwise.

These cognitive and emotional biases can cloud investor judgment, sometimes leading them astray from long-term goals. And when that investor is a fiduciary responsible for maintaining trust assets, those decisions can have far-reaching impacts on the lives of others, namely, beneficiaries.

Trustees work with investment advisors to formulate an investment strategy that aligns with the beneficiaries’ long-term goals. The trustee is tasked with educating beneficiaries on the benefits of maintaining financial discipline.

The IPS: Your rational anchor

An important component: the IPS, which stands for “investment policy statement.” An IPS is like a global positioning system, the trustee’s North Star — an unwavering companion in the tumultuous world of investing. An IPS helps the trustee to establish a plan and a process for sticking to it. It establishes clear and measurable goals, guidelines, and benchmarks for the trust portfolio and provides a framework for monitoring and evaluating the performance and suitability of the investments.

An IPS is like a global positioning system, the trustee’s North Star — an unwavering companion in the tumultuous world of investing.

An IPS should include the following:

A statement of purpose and background, including the type of trust, beneficiaries, tax status, unique assets, and all material investment facts, assumptions, and opinions. The IPS should be considered a current working tool rather than a static or historical document.

  • The investment decision-making process, including the use of prudent experts.
  • The intended diversification of assets, paying regard to specific risk/return objectives of the beneficiaries.
  • The procedures used to monitor the activities of all money managers and service providers.
  • The methods intended to control investment expenses and ensure the best price and execution of investment transactions.
  • Trust provisions, including income payments, use of principal, level of required pretax return given trust terms, and number and type of remainder beneficiaries.
  • Time horizon, taking into regard the ages and health of beneficiaries, ultimate and interim distribution patterns, and liquidity needs.

Given the importance of the IPS, consider having it prepared by a professional investment advisor who specializes in investment consulting, is well-versed in the prudent investment management process, and is familiar with the laws governing these included in the document. And due to the potential for conflicts of interest, the IPS shouldn’t be written by money managers or product vendors who may benefit by writing the IPS to the specifications of their product.

When trustees fail to implement a systematic approach to investing, beneficiaries may lose.

The art of rational investing isn’t about predicting the future or beating the market, it’s about defining goals and following the plan. When it comes to investing trust assets, it’s about being consistent, disciplined, and prudent. It’s about having an IPS — your personal GPS.

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