As a policy document rather than an implementation directive, the IPS should provide guidance for how investment decisions will be made; it should not be a list of the specific securities to be used.
Both the manager and the client generally sign the document, indicating acknowledgment of and agreement to its several parts.
This can serve to protect both parties in the event of a future disagreement, as long as they have respectively adhered to the content of the IPS.
When auditing an ERISA plan, the U.S. Department of Labor regularly asks to review the associated IPS.
Finally, and most importantly, an IPS provides a guide for making future investment decisions.
Having and using the policy statement compels the trustees to be more disciplined and systematic, which in itself should improve the odds of meeting the investment goals.
The US Uniform Prudent Investor Act (UPIA) is state-adopted legislation that governs the investment conduct of private family trusts.
First enacted in 1994, it serves as the hallmark of subsequent legislation (as well as how the courts now interpret such requirements relating to ERISA).
UPIA requires a written investment policy for every trust in which trustees manage assets for the benefit of others.
It also makes clear that if appropriate investment processes are in place and followed, the trustees will not be held responsible for the results.
Financial Industry Regulatory Authority (FINRA) member firms and Registered Investment Advisors (RIAs) are subject to two primary obligations in terms of consumer protection: "suitability" and "fair dealing."
A well-crafted IPS will include all the relevant information needed for the broker to establish that both the suitability and fair dealing requirements have been satisfied.
RIA firms must be registered as providing investment management services with either the U.S. Securities and Exchange Commission (SEC) or with the equivalent state office.
It is therefore important that the advisor periodically returns to the first step "discovery" to make sure the client's then-current needs and wishes are being addressed.
Any constraints and restrictions on the assets, such as liquidity and marketability requirements, diversification concentrations, the advisor's investment strategy (including tax management), locations of assets by account type (taxable versus tax-deferred), how client accounts that are not being managed (if any) will be handled, and any transaction prohibitions.