Investment Policy Statement Example

Transcription

1 Wealth Management Services Investment Consulting Investment Policy Statement Example High Net Worth Individual / Family Wealth (John & Mary HNW Client) Approved on June xx, 20xx FOR INFORMATIONAL PURPOSES ONLY It is intended that this investment policy statement be reviewed and updated at least annually. Any change to this policy should be communicated in writing on a timely basis to all interested parties. Clients may wish to have legal counsel review their IPS before it is approved. use by Advisors to serve as an example of the type of information that may be included in a comprehensive IPS for educational purposes only. It is not representative of an actual client document, nor is it intended to provide authoritative guidance or legal advice.

2 Hypothetical Executive Summary (As of June xx, 20xx) Type of Organization Plan Established John & Mary HNW Client Family Trust May xx, 20xx Tax ID# Custodian Investment Advisor Tax Status Current Assets Time Horizon Risk Tolerance Modeled Return ABC Custody Co., Inc. XYZ Wealth Management, Inc. Taxable and Tax-Deferred $4,500,000 Taxable; $500,000 Tax-Deferred Greater than 10 years Moderate, losses not to exceed 15.00% per year, and a standard deviation not greater than 15%, based on a statistical confidence level of 95% 10.20% (at least 5.00% over inflation) Modeled Loss % (Probability level of 5%) Modeled Standard Deviation 14.30% Hypothetical Asset Allocation Lower Limit Strategic Allocation Upper Limit Domestic Large-Cap Equities Blend 15% 15% 25% Growth Value Mid-Cap Equity Small-Cap Equity International Equities Intermediate-Term Fixed Income Liquid Alternative Assets Cash Equivalent

3 I. Statement of Purpose The purpose of this Investment Policy Statement ( Statement ) is to establish a clear understanding between the investor ( Investor ) and the investment advisor ( Advisor ) as to the investment objectives and policies applicable to the Investor s asset allocation portfolio ( Portfolio ). This Statement will: Establish reasonable expectations, objectives and guidelines in the investment of the Portfolio s assets. Set forth an investment structure detailing permitted asset classes, normal allocations and permissible ranges of exposure for the Portfolio. Encourage effective communication between the Investor and the Advisor. Create the framework for a well-diversified asset mix that can be expected to generate acceptable long-term returns at a level of risk suitable to the Investor. This statement is not a binding contract. This Statement is intended to be a summary of an investment philosophy that provides guidance for the Investor and the Advisor. II. Background and Investment Objectives Hypothetical Illustration: Mr. and Mrs. Client are 53 and 49 years old respectively, and have three children ages 19, 16, and 12, all of whom still live at home. Mr. Client is an attorney and Mrs. Client is an architect. They have $5,000,000 in investment assets in both taxable and tax-deferred accounts, including $500,000 in UTMAs and 529s to pay for their children s undergraduate educations. They do not plan to pay for any graduate studies. While their annual income fluctuates modestly from year to year, their average annual income is roughly $500,000. With 10 years to retirement and an expected 30+ years in retirement, Mr. and Mrs. Client have a 40+ year time horizon, and they expect inflation to average 3%. Mr. and Mrs. Client would like to retire in 10 years, when their last child completes her undergraduate studies. At that time, their goal is to have saved $8,000,000, and they would like to have an annual income from the investment Portfolio of $350,000, increased annually for inflation, without running out of money. They expect their investments to at least keep up with, and ideally increase at, a rate 5% higher than the annual inflation rate. No guarantees can be given about future performance and this Statement shall not be construed as offering such guarantee. Mr. and Mrs. Client are experienced investors, and they have historically managed their own investments. They last worked with a financial advisor 10 years ago with disappointing results. Since that time they have primarily utilized no-load mutual funds. They would now like to implement the tenets of modern portfolio theory into the management of their investments. They understand that in order to achieve superior returns, they may have to accept some risk. Therefore, they will balance taking as much risk as necessary to achieve a higher long-term rate of return against their ability to tolerate that risk and not panic in a downturn.

4 In addition, they recognize it is impossible to know which asset class will outperform each year; therefore, they will diversify across a wide range of investment opportunities to participate in the upside of most asset-class performance without over-concentrating in one area and risking a loss that cannot be tolerated. Given that Mr. and Mrs. Client have a long-term time horizon, they are willing to tolerate short-term market fluctuations of up to a 15% loss in any one year. Their risk tolerance may be defined as moderate to moderately aggressive. In addition, Mr. and Mrs. Client have good income stability, and insurance coverage, adequate liquidity and net worth and plan to add to their investment Portfolio over time providing them considerable financial capacity to take on risk. Mr. and Mrs. Client are currently in the highest federal income tax bracket (39.6%), but anticipate falling to the second highest bracket (35%) after retirement. In addition, they are subject to the Alternative Minimum Tax (AMT). Mr. and Mrs. Client have a significant capital gains liability in their taxable accounts. To avoid an unduly high tax bill in any one year, if they decide to sell out of a significant position, they will strongly consider doing this over a period of time. In addition, with regard to the fact that there are significant assets in tax-deferred accounts, rebalancing should, if possible, be implemented first in these accounts to minimize the overall tax impact. Upon retirement, an analysis should be run to determine the best method of withdrawal between taxable and taxdeferred or tax-free accounts. Mr. and Mrs. Client currently have $250,000 in liquid investments, and don t plan to take withdrawals from the investment Portfolio prior to retirement. At retirement, decision rules will be utilized to manage withdrawals to protect the Portfolio from adverse market conditions as well as periods of higher than average inflation. The decision rules are outlined in Appendix A. A minimal allocation to cash will be made for administrative purposes only. III. Roles and Responsibilities Investor Mr. and Mrs. Client are responsible for: Oversight of the Portfolio. Defining the investment objectives and policies of the Portfolio. Directing the Advisor to make changes in the investment policy and to oversee and approve or disapprove the Advisor s recommendations with regards to policy, guidelines, objectives and specific investments on a timely basis. Providing the Advisor with all relevant information on the Investor s financial condition and risk tolerance and notifying the Advisor promptly of any changes to this information. Reading and understanding the information contained in the prospectus and each investment in the Portfolio. Exercising all rights, including voting rights, as acquired through the purchase of securities.

5 Investment Advisor The Advisor is expected to manage the Portfolio in a manner consistent with this IPS and in accordance with state and federal law and the Uniform Prudent Investor Act. The Advisor is responsible for: Designing, recommending and implementing an appropriate asset allocation plan consistent with the investment objectives, time horizon, risk profile, guidelines and constraints outlined in this statement. Recommending an appropriate custodian to safeguard the Investor s assets. Advising the Investor about the selection of and the allocation of asset categories. Identifying specific assets and investment managers within each category. Ensuring that the custodian provides the Investor with a current prospectus, where applicable, for each investment proposed for the Portfolio. Monitoring the performance of all selected assets. Recommending changes to any of the above. Periodically reviewing the suitability of the investments for the Investor. Being available to meet with the Investor at least annually as well as at other times within reason at the Investor s request. Preparing and presenting appropriate reports. Investment Manager Investment Managers are responsible for making investment decisions (security selection and price decisions). The specific duties and responsibilities of each investment manager are: Managing the assets under their supervision in accordance with the guidelines and objectives outlined in their agreement. Voting promptly all proxies and related actions in a manner consistent with the long-term interest and objectives of the trust. Each investment manager shall keep detailed records of the voting of proxies and related actions and will comply with all applicable regulatory obligations. Communicating with the Investor all significant changes pertaining to the fund it manages or the firm itself. Effecting all transactions for the Portfolio subject to best price and execution. If a manager utilizes brokerage from the Portfolio assets to effect soft dollar transactions, detailed records will be kept and communicated to the trustees. Using the same care, skill, prudence, and due diligence under the circumstances then prevailing that experienced investment professionals, acting in a like capacity, and fully familiar with such matters, would use in like activities for like Portfolios, with like aims, in accordance and compliance with the Uniform Prudent Investor Act and all applicable laws, rules, and regulations. Custodian The Custodian is responsible for the safekeeping of the Portfolio s assets. The specific duties and responsibilities of the Custodian are:

6 Providing monthly reports that detail transactions, cash flows, securities held and their current value, and change in value of each security and the overall Portfolio since the previous report. Maintaining separate accounts by legal registration. Valuing the holdings. Collecting all income and dividends owed to the Portfolio. Settling all transactions (buy-sell orders) initiated by the Investment Manager. IV. Investment Guidelines Mr. and Mrs. Client believe in the fundamental concept of allocating their assets over a variety of subasset allocation categories. Their preference is to include large-cap value stocks, large-cap growth stocks, mid/small-cap stocks, international stocks, bonds and cash. They choose not to use emerging markets funds or most sector funds as they do not believe they will be appropriately compensated for the level of risk they would be exposed to. Mr. and Mrs. Client always plan to have at least 5% of the Portfolio invested in cash, but never plan to have more than 15% of the Portfolio invested in cash. They do not want more than 40% of their assets in mid/small-cap stocks or more than 30% in international stocks. They do not want to have less than 25% of their assets in large-cap stocks. They would never want the combination of cash and bonds to be more than 50% of the Portfolio. These limits, as illustrated below, represent how much risk Mr. and Mrs. Client are willing to take with their overall Portfolio. Hypothetical Asset Allocation Domestic Large-Cap Equities Lower Limit Strategic Allocation Upper Limit Blend 15% 15% 25% Growth Value Mid-Cap Equity Small-Cap Equity International Equities Intermediate-Term Fixed Income Liquid Alternative Assets Cash Equivalent

7 Rebalancing Procedures FOR INFORMATIONAL PURPOSES ONLY The Advisor manages the allocation of assets in the Portfolio. From time to time when market conditions warrant, and as deemed necessary by the advisor in consultation with the client, the allocation of assets in the Portfolio may deviate from the normal allocation within the permitted range. Such deviations are minor modifications to the strategic normal allocations and are not an attempt to time the market. These periodic modifications are designed primarily to reduce overall investment risk in the long term. When market conditions cause the Portfolio's allocations to vary from the initial established allocation, they will be rebalanced back to the recommended weighting when such weightings vary above or below their stated upper and lower limits. Permitted Securities To implement the recommended asset allocation, the Portfolio will invest in different types of securities that focus on specific segments of each asset class. Permitted security types include: Individual stocks Mutual funds stocks, bonds, money market funds Separately managed accounts stocks or bonds Individual bonds, as long as they are rated A or better and traded on a major U.S. exchange Closed-end funds Unit investment trusts Exchange-traded funds Liquid alternative assets Prohibited Securities and Prohibited Transactions Following are securities and transactions that are prohibited from the Portfolio: Venture capital Covered call options Purchases of letter stock, private placements, or direct payments Puts, calls, straddles, or other option strategies used for speculative purposes Liquid Alternative Assets Alternative investments involve investing in nontraditional asset classes and in traditional asset classes structured in a nontraditional manner. These investments are intended to provide enhanced returns and dampened volatility to the overall Portfolio. A portion of the Portfolio may be allocated to readily marketable alternative investment strategies that include: Long/short equity Relative value (i.e. equity market neutral, fixed income and convertible bond arbitrage) Directional (i.e. global allocation and global macro) Commodities (i.e. managed futures, ETF/ETN) Real estate (limited to liquid REIT investment funds)

8 Assets invested within alternative investment strategies shall be limited to the following parameters: Single strategy, multi-strategy and fund-of-funds investments are permitted. Investment in any single manager will be limited to XX% of the total Liquid Alternative Investments Portfolio allocation. No investment within a single fund may exceed XX% of the fund s total assets. Non-marketable or limited liquidity investments are not permitted. Investment Manager Selection The following minimum criteria will be used to select investment managers in each asset class: Manager performance that is better than 50% of its peers. Manager performance that is better than 50% of its peers relative to assumed risk. A recognizable track record of at least 3 5 years. Assets of at least $50 $75 million. At least 80% of the holdings in the product match the stated style. A manager or management team that has been in place for at least two years. Expenses that are not among the highest cost (top 25%) of their peer group. V. Monitoring and Control Procedures Measuring Costs All costs associated with the management of the Portfolio s overall investment program will be reviewed at least annually. The review shall include, but is not limited to, the following areas: Reports Expense ratios and/or separate account management fees will be compared against the appropriate peer group. Investment fees shall fall within a reasonable range of the median peer group average taking into account the Portfolio size, asset class and share class. Custodial fees, which pertain to the holding of assets, collection of income and disbursement of payments from the Portfolio account(s). Review of Portfolio manager s adherence to best execution trading strategies designed to reduce or limit costs associated with trading within the Portfolio. The investment custodian will provide the Investor with monthly statements for each account that list all assets held by the Investor, values for each asset and all transactions affecting assets within the Portfolio, including additions and withdrawals. In addition, the Advisor will provide the Investor no less frequently than quarterly, and within 30 days of the end of each quarter, the following management reports: Portfolio performance results over the last quarter, 1, 3, 5 and 10 years. Performance results of comparative benchmarks for the last quarter, 1, 3, 5 and 10 years. Performance results of each individual holding for the quarter.

9 Performance will be reported on a basis that is in compliance with recognized industry standards. End-of-quarter status regarding asset allocation current vs. policy. Any recommendations for changes of the above. Meetings and Communication between Investor and Advisor As a matter of course, the Advisor will keep the Investor apprised of any material changes in the Advisor s outlook, recommended investment policy and tactics. In addition, the Advisor will meet with the Investor approximately annually to review and explain the Portfolio s investment results and any related issues. The Advisor will also be available on a reasonable basis for telephone and communication as needed. Provisions for Putting Managers on Watch and Making Changes Mr. and Mrs. Client and their advisor will review the Portfolio performance on a quarterly basis. At that time, they will not only review the returns of each of the investments against their peer groups, but will also determine whether these investments are achieving their stated goals. We will ask the following questions about the investments: Has the allocation to the investment changed by more than the upper or lower boundaries outlined in this IPS? If so, consider selling some of the gains (and perhaps netting out some losses) or rebalancing within tax-deferred accounts. Did the overall Portfolio beat inflation by 5%? If not, what changes are necessary to meet this criterion? Are performance expectations reasonable? Are there any changes to make due to a shortened time horizon? Were there losses in the Portfolio? Were overall Portfolio losses within the loss limits specified above? If not, which individual securities were responsible for the overall losses? Has anything fundamentally changed for these securities? Do we want to make a change? Are the securities in the top one-half of their peer groups? If not, they should go on a watch list. It s not time to sell, just time to keep a close eye on future developments. If the security is on the watch list for more than two or three quarters, determine whether or not it is still meeting its long-term goals. If not, it s time to sell. (If it s held in a taxable account, try to balance losses with gains.) If a sale is contemplated, we will ask the following questions: o o Is the investment preventing the Investor from achieving their goals? Are the tax impacts of selling outweighed by the opportunities of a new investment?

10 VI. Adoption of Investment Policy Statement I (we) have reviewed, approved, and adopted this Investment Policy Statement prepared with the assistance of (Advisor). Investor s Signature Date Investor s Signature Date Advisor s Signature Date

11 Appendix A: Decision Rules for Retirement Income Upon retirement, the Portfolio is expected to provide a consistent stream of income to the Investor(s) to last for the rest of their lives. An Initial Withdrawal Rate (IWR) will be determined at the beginning of retirement in consultation with the Investment Advisor based on the Investor s income needs and assets available. In order to manage the determined rate throughout the withdrawal period, the following rules are to be utilized. Condition Prior year s Portfolio return is negative Current withdrawal rate is within 20% of the initial withdrawal rate Current withdrawal rate is > the initial withdrawal rate by 20% Current withdrawal rate is < the initial withdrawal rate by 20% Action No increase in the withdrawal amount from the previous year Increase prior year withdrawal by the CPI with a maximum increase of 6% Reduce the withdrawal amount by 10% after adjusting for inflation Increase the prior year withdrawal amount by 10% after adjusting for inflation Disclosure This material is not intended to be a recommendation or investment advice, does not constitute a solicitation to buy or sell securities, and is not provided in a fiduciary capacity. The information provided does not take into account the specific objectives or circumstances of any particular investor, or suggest any specific course of action. Investment decisions should be made based on an investor's objectives and circumstances and in consultation with his or her advisors. This report is provided for informational and educational purposes only. The statements contained herein are the opinions of Nuveen Wealth Management Services. All opinions and views constitute our judgments as of the date of writing and are subject to change at any time without notice. Hypothetical examples are shown for illustrative and educational purposes only. Information was obtained from third party sources, which we believe to be reliable but not guaranteed for accuracy or completeness. Neither Nuveen Investments nor any of its affiliates or their employees provide legal or tax advice. This report contains no investment recommendations and should not be construed as specific tax, legal, financial planning or investment advice. Neither Nuveen nor any of its affiliates, directors, employees or agents accepts any liability for any loss or damage arising out of the use of all or any part of this report. All investments carry a certain degree of risk, including possible loss of principal, and there is no assurance that an investment will provide positive performance over any period of time. Equity investments are subject to market risk or the risk that stocks will decline in response to such factors as adverse company news or industry developments or a general economic decline. Debt or fixed income securities are subject to market risk, credit risk, interest rate risk, call risk, tax risk, political and economic risk, and income risk. As interest rates rise, bond prices fall. Non-investment-grade bonds involve heightened credit risk, liquidity risk, and potential for default. Foreign investing involves additional risks, including currency fluctuation, political and economic instability, lack of liquidity and differing legal and accounting standards. These risks are magnified in emerging markets. Value and growth style investing may fall out of favor and underperform other style investing during given periods. In addition, value style investing presents the risk that the holdings or securities may never reach their full market value because the market fails to recognize what the Portfolio management team considers the true business value or because the Portfolio management team has misjudged those values. Certain sectors or growth stocks may shift characteristics over a long market cycle and may not perform in line with stated benchmarks. Nuveen Securities, LLC, member FINRA and SIPC, is a subsidiary of Nuveen, LLC Nuveen, LLC INV-Y-08/18