An Investment Policy Statement (“IPS”) is a legal requirement under the Trustee Act 2000 (“The Act”) for UK Trustees and documents the investment management of a portfolio. It should be consistent with the trusts aims and give a clear understanding on fundamental matters such as the accepted level of risk, expected outcomes as well as any investment restrictions. It should also give other key areas such as time horizon and income requirements. All of these factors will be matters on which a managers overall performance will be judged. The document is drawn up between the trustees and the investment manager to whom investment powers have been delegated.
To assist the wording of c 29 Part IV 15 of The Act is clear:
- (1) The trustees may not authorise a person to exercise any of their asset management functions as their agent except by an agreement which is in or evidenced in writing.
- (2) The trustees may not authorise a person to exercise any of their asset management functions as their agent unless –
- a) they have prepared a statement that gives guidance as to how the functions should be exercised (‘a policy statement’), and
- b) the agreement under which the agent is to act includes a term to the effect that he will secure compliance with:
- (i) the policy statement, or
- (ii) if the policy statement is revised or replaced under section 22, the revised or replacement policy statement.
- (3) The trustees must formulate any guidance given in the policy statement with a view to ensuring that the functions will be exercised in the best interests of the trust.
- (4) The policy statement must be in or evidenced in writing.
- (5) The asset management functions of trustees are their functions relating to:
- (a) the investment of assets subject to the trust,
- (b) the acquisition of property which is to be subject to the trust, and
- (c) managing property which is subject to the trust and disposing of, or creating or disposing of an interest in, such property.
Can it help?
The existence of an IPS assists the trustees in establishing and recording its policies to maintain consistency of its policies when managing trust investments as well as documenting change over time. Equally, it helps to clarify the trustee’s expectations of prospective investment managers who are hired in terms of understanding and quantifying appropriate levels of risk, expected return, income needs, time horizons and restrictions.
It can be seen as a directive to the investment manager on key client expectations during the management of a portfolio but should also set out responsibilities to be borne by each party. Except for specific restrictions (on, say, Structured notes or illiquid assets) it should not direct a manager who should understand that, notwithstanding those restrictions, by signing to and agreeing on the provisions of the IPS they are going to be held responsible for investment decisions.
Is it really needed?
The IPS is a legal obligation under The Act for Trust set up and operated within the UK. However it is not a legal requirement in “Offshore jurisdictions” such as the Channel Islands, the Isle of Man, the Caribbean, Singapore, Malta or the Middle East. Current best practice is the use of an IPS when dealing with investments for Trusts and Trustees is now, and should, be expected.
Instead of being viewed as a chore an IPS should be looked on as something that helps to create an environment of openness, understanding and transparency in the relationship between client and advisor. It offers clients a better understanding of what to expect from their advisor and, perhaps more importantly, the investment manager is aware of the expectations of the client in key areas. It should not place impossible restrictions on the manager to stop them using their skills to meet the investment return aims and protect the value of the real value of the investments. Other details such as benchmarks, drawdown, fees and tax issues can also be incorporated to clarify the Trustees needs.
Once you’ve put a policy in place it must maintain its relevance according to changes in circumstances. For more information on the Investment Policy Statement and its uses please contact Russell Bussey on 01892 532870.