Question

QUESTION #4 - INVESTMENT POLICY STATEMENTS (12 Marks)

REQUIRED:

1. In your own words, explain the purpose of an Investment Policy Statement (IPS). (3 Marks)
2. What information should be included in the IPS? List 3 items.(3 Marks)
3. Explain three (3) differences between an IPS and the “Know Your Client Form”. (6 Marks)

Answer 1

Part a) The IPS is the charter for the investment of the money for a client. It contains the aims and objectives for which the investment is being made and gives an account of the client's risk bearing willingness and capacity. The purpose of an IPS is to guide the investment manager where and how to invest his client's money in order to achieve his aims and objectives while staying withing the risk limits set by him.

Part b) Three components of an IPS are:

• Risk objective: This defines how much risk is appropriate for the client
• Return Objective: This determines how much return is required for the client
• Constraints: These are liquidity, legal, tax, time horizon, unique circumstances, these are formulated after considering the risk and return objectives and the regulatory framework where the investment needs to be made.

Part c) Difference between IPS and KYC form:

• KYC could be a component of IPS while IPS is a lot broader because it involves getting to know the customer and developing the investment objectives while KYC form ends where the client information has been gathered
• KYC is factual while IPS also looks into the behavioral aspects of the client for example, even with a high risk bearing capacity, some clients have low willingness so IPS will consider the same if the return objectives are being met
• KYC may not be used for investment purpose where as IPS is developed only for investment purpose. KYC may only be fore data collection of the client and may contain information such as Name, address, social security number etc..