ELEMENTS OF

AN INVESTMENT
POLICY STATEMENT
FOR INDIVIDUAL
INVESTORS
ELEMENTS OF
AN INVESTMENT
POLICY STATEMENT
FOR INDIVIDUAL
INVESTORS
© 2010 CFA Institute. All rights reserved.

CFA Institute is the global association of investment professionals that sets

the standards for professional excellence. We are a champion for ethical
behavior in investment markets and a respected source of knowledge in the
global financial community.

Our mission is to lead the investment profession globally by promoting the

highest standards of ethics, education, and professional excellence for the
ultimate benefit of society.

ISBN: 978-0-938367-31-4
May 2010
Contents
INTRODUCTION   1
1. Scope and Purpose   3
1a. Define the context.   3
1b. Define the investor.   3
1c. Define the structure.   4
2. 
Governance   6
2a. Specify who is responsible for determining investment policy,
executing investment policy, and monitoring the results of
implementation of the policy.   6
2b. Describe the process for reviewing and updating the IPS.   6
2c. Describe responsibility for engaging and discharging external
advisers.   7
2d. Assign responsibility for determination of asset allocation,
including inputs used and criteria for development of input
assumptions.   7
2e. Assign responsibility for risk management, monitoring, and
reporting.   8
3. Investment, Return, and Risk Objectives   9
3a. Describe the overall investment objective.   9
3b. State the return, distribution, and risk requirements.   9
3c. Define the risk tolerance of the investor.   11
3d. Describe relevant constraints.   12
3e. Describe other considerations relevant to investment strategy.   14

© 2010 CFA INSTITUTE. ALL RIGHTS RESERVED. iii

4. 
Risk Management   16
4a. Establish performance measurement and reporting
accountabilities.   16
4b. Specify appropriate metrics for risk measurement and evaluation.  16
4c. Define the process for rebalancing portfolios to target allocations.  17
INTRODUCTION
Providing investment counsel to individuals requires addressing a variety of priorities and
concerns in addition to addressing the absolute bottom line of investment performance.
The investment strategy must be considered in the context of the client’s overall financial
plan, short- and long-term objectives, risk tolerance, and preferences. The potential com-
plexity associated with taking all of these factors into account in an investment strategy
requires a disciplined approach.

The investment policy statement (IPS) serves as a strategic guide to the planning
and implementation of an investment program. When implemented successfully, the
IPS anticipates issues related to governance of the investment program, planning
for appropriate asset allocation, implementing an investment program with internal
and/or external managers, monitoring the results, risk management, and appropriate
reporting. The IPS also establishes accountability for the various entities that may
work on behalf of an investor. Perhaps most importantly, the IPS serves as a policy
guide that can offer an objective course of action to be followed during periods of
market disruption when emotional or instinctive responses might otherwise motivate
less prudent actions.

The IPS is a highly customized document that is uniquely tailored to the preferences,
attitudes, and situation of each investor. Templates that purport to offer convenience and
ease in development of an IPS almost inevitably sacrifice consideration of factors that are
highly relevant to the investor. The investment professional must thoroughly understand
the investor’s objectives, restrictions, tolerances, and preferences to be able to develop a
truly useful policy guide.

“Elements of an Investment Policy Statement for Individual Investors” suggests desir-

able components of an IPS for a high-net-worth or individual investor. Not every element
will be appropriate for every investor or every situation, and other components reflecting
unique investor circumstances may be desirable for inclusion.

An investor with a current IPS may choose to evaluate that IPS in relation to these
elements, and those embarking on development of a new IPS may choose to consider
focusing on the elements discussed here.

© 2010 CFA INSTITUTE. ALL RIGHTS RESERVED. 1

Elements of an Investment Policy Statement for Individual Investors

For each element, an example of IPS language is presented that may be relevant to an
individual investor. The examples are entirely fictitious and are provided to suggest how
components might be documented. For an example to reflect appropriate language for a
particular investor would be an improbable coincidence. Rather, the most relevant and
useful language should be developed in consultation between the investment counselor
and the client.

2 WWW.CFAINSTITUTE.ORG
1. Scope and Purpose
1a. Define the context.
A preamble is often useful to relate information about the investor and/or
the source of wealth as a way of establishing the context in which an invest-
ment program will be implemented.

■■ Example: “The assets of the Leveaux Family Trusts trace back to the estab-
lishment of Leveaux Vintners in 1902 by Claude Leveaux. Over the course
of the next 77 years, three generations of the Leveaux family worked to
build the family business, LVX Industries, to include distilled spirits,
gourmet snack foods, and the LVX chain of cafes in Europe and Canada.
Each business line was grounded in the philosophy of delivering outstand-
ing quality and value to consumers as well as investing in the communities
in which Leveaux did business. In 1979, LVX Industries was purchased by
the British conglomerate FoodCo for the equivalent of US$272 million.
Michelle Leveaux established the Leveaux Foundation with $100 million
of the sale proceeds, and much of the remainder constituted the Leveaux
Family Trusts, which are the subject of this Investment Policy Statement.”

1b. Define the investor.

Define who the investor is, be it a natural person or legal/corporate entity.

■■ Example: “This Investment Policy Statement governs the personal invest-

ment portfolios of Mr. Chen Guangping.”

Specify which of the investors’ assets are to be governed by the IPS.

■■ Example: “Investment portfolios governed by this Investment Policy

Statement include all portfolios established in Jorge Castillo’s name, port-
folios established in his name with joint rights of survivorship with Maria
Castillo, charitable remainder trusts established by Jorge Castillo, and
Uniform Gifts To Minors Accounts established for the benefit of Jorge
Castillo, Jr., and Cynthia Castillo.”

© 2010 CFA INSTITUTE. ALL RIGHTS RESERVED. 3

Elements of an Investment Policy Statement for Individual Investors

1c. Define the structure.

Set forth key responsibilities and actors.

■■ Example: “Janice Jones, as financial adviser to Sam and Mary Smith, is

responsible for coordinating updates to the Investment Policy, including
soliciting input from the designated tax and legal advisers to Sam and
Mary Smith. Ms. Jones is also responsible for monitoring application of
the Investment Policy Statement and shall promptly notify Sam and Mary
Smith of the need for updates to the Policy and/or violations of the Policy
in implementation. Sam and Mary Smith shall be responsible for approv-
ing the Investment Policy Statement and all subsequent revisions to it.”

Set forth a “standard of care” for those serving as advisers. Regulations in

different jurisdictions may allow advisers to abide by different standards that
depend on their preferences, business models, and client preferences. Fiduciary
standards generally require that advisers always consider client interests fore-
most, whereas suitability standards require recommendations that are suitable
for an investor based on the adviser’s knowledge of that investor’s circum-
stances. Investors may not perceive or understand the distinction unless the
issue is addressed in the IPS.

■■ Example: “Fuji Advisors acts as a fiduciary in its capacity as adviser to the

Takesumi Family Accounts and acknowledges that all advice and decisions
rendered must reflect first and foremost the best interests of its clients. Fuji
Advisors also affirms its compliance as a firm with the CFA Institute Asset
Manager Code of Professional Conduct.”

Identify an organizational structure for investing.

■■ Example: “The trustees of the Wei Family Trust shall designate an invest-
ment adviser who shall have exclusive discretionary authority to invest on
behalf of the Trust consistent with the policies set forth in the Investment
Policy Statement, except that the portfolio established at ZZZ Trust
Company identified as “Wei Trust Discretionary Portfolio 1” shall be
managed exclusively by Mr. Wei Zhang.”

4 WWW.CFAINSTITUTE.ORG
 Scope and Purpose

Identify a risk management structure applicable to investing.

■■ Example: “Susan Smith, as investment adviser to Russell Roberts, is

responsible for monitoring investment risks and reporting them to Russell
Roberts in the reporting format that has been agreed to, a sample of which
is presented in Appendix XX.”

Assign responsibility for monitoring and reporting.

■■ Example: “The HHH Trust Company will provide custody services and
is responsible for rendering a monthly financial report for the Devereaux
Trust. The HHH Trust Company report shall be considered to be the offi-
cial record for the Trust accounts and shall be the basis for the risk review
to be performed by Judith Jones as adviser to the Trust.”

Document acceptance of the IPS.

■■ Example: “By their signatures below, the Xien Trust trustees and LLL
Investment Counsel acknowledge both receipt of this document and
acceptance of its content.”

© 2010 CFA INSTITUTE. ALL RIGHTS RESERVED. 5

2. Governance
2a. Specify who is responsible for determining
investment policy, executing investment
policy, and monitoring the results of
implementation of the policy.
The IPS documents accountability for all stages of investment policy development and
implementation. It can reinforce the obligations of advisers to offer counsel and the obli-
gations of principals to ultimately approve or disapprove of the policy.

■■ Example: “As trustee for the Charitable Remainder Trust, Nigel Brown is responsible
for approval of the investment policy and any subsequent changes to it. In their capac-
ity as counselors to the Trust, Tower Capital shall counsel the trustee as to devel-
opment of the Investment Policy, suggest appropriate revisions to the Policy on an
ongoing basis, and monitor and report results achieved through implementation of
the Policy on no less than a monthly basis.”

2b. Describe the process for reviewing and

updating the IPS.
A process for refreshing the IPS as investor circumstances and/or market conditions
change should be clearly identified in advance.

■■ Example: “Wanda Wood is responsible for monitoring the investing requirements of

Sam and Susan Smith as well as monitoring investment and economic issues, and Ms.
Wood is responsible for suggesting changes to the IPS as necessary. Ms. Wood shall
review the IPS with Sam and Susan Smith no less frequently than annually.”

6 WWW.CFAINSTITUTE.ORG
 Governance

2c. Describe responsibility for engaging and

discharging external advisers.
The IPS should set forth who is responsible for hiring and firing external money manag-
ers, consultants, or other vendors associated with the investment assets.

■■ Example: “Marcel Perrold delegates exclusive authority to his financial adviser,

Francois Finault, to retain and dismiss individuals and/or firms to manage Mr.
Perrold’s investment assets. Francois Finault shall, prior to hiring any external
investment manager, disclose in writing to Mr. Perrold any compensation or other
consideration received or due to be received from the external investment manager.”

2d. Assign responsibility for determination of

asset allocation, including inputs used and
criteria for development of input assumptions.
An asset allocation framework provides strategic context for many tactical investment
decisions. Asset allocation policies are likely to change over time as characteristics of the
investor change and as market circumstances vary. Accordingly, the IPS might include an
asset allocation policy statement as an appendix, which can be revised without requiring
approval of an entirely new IPS. The IPS, however, should address the assumptions used
in developing and selecting inputs to the asset allocation decision process.

■■ Example: “At least annually, Tower Capital shall review the asset allocation of the
Family Investment Accounts and suggest revisions for final approval by James and
Jennifer Jensen. The asset allocation plan is incorporated as Appendix A to this
Investment Policy Statement. It shall consider the proportions of investments in cash
equivalents, municipal securities, U.S. fixed-income obligations, U.S. large-capital-
ization equities, U.S. small-capitalization equities, and American Depositary Receipts
(ADRs). Tower Capital shall consider expected returns and correlations of returns for
a broad representation of asset classes in the U.S. capital markets and consider antici-
pated changes in the rate of inflation and changes in marginal tax rates.”

© 2010 CFA INSTITUTE. ALL RIGHTS RESERVED. 7

Elements of an Investment Policy Statement for Individual Investors

2e. Assign responsibility for risk management,

monitoring, and reporting.
The IPS should document who is responsible for setting risk policy, monitoring the risk
profile of the investment portfolio, and reporting on portfolio risk.

■■ Example: “As investment adviser, Tower Capital is responsible for using the state-
ments prepared by CCC Brokerage as a basis for evaluating that the risk profile of
the Jorge Luiz account is consistent with the risk management policies approved and
adopted by Jorge Luiz (see Appendix ZZZ). Tower Capital shall be responsible for
identifying variances in risk positions that exceed tolerable limits as specified in the
risk management policies and shall take prompt corrective action. No less than quar-
terly, Tower Capital shall provide to Jorge Luiz a reporting of the all such variances in
the prior quarter.”

8 WWW.CFAINSTITUTE.ORG
3. Investment, Return, and Risk
Objectives
3a. Describe the overall investment objective.
The IPS should relate the purpose of the assets being invested to one or more broad
investment objectives.

■■ Example: “The investment program governed by the IPS is intended to supplement

the earned income of Marcel Perrold in satisfying ongoing living expenses and to
provide funds upon his retirement in 2016.”

3b. State the return, distribution, and risk

requirements.
State the overall investment performance objective. Careful specification of
the overall investment performance objective is likely to incorporate descrip-
tions of general funding needs and the relationships of those needs to key fac-
tors (e.g., inflation, a spending rate).

■■ Example: “The financial plan developed for Margarita Mendez in 2007

indicates a required real growth rate of 4 percent to satisfy her future obli-
gations and allow her to retire in 2017 as planned.”

Identify performance objectives for each asset class eligible for investment.
The IPS should set forth all permissible asset classes in which the portfolio
may be invested. Some investors may benefit from using techniques to risk-
adjust the asset class’s benchmark return and portfolio return for purposes
of comparison. Note that, although some asset classes may not be used at all
times, they should still be identified in the IPS. For each asset class, a brief
description of the class should be provided and a benchmark for performance
should be identified. Within each asset class, subordinate asset classes may be
listed (for example, U.S. large-cap equity may be a subclass of U.S. equity).

© 2010 CFA INSTITUTE. ALL RIGHTS RESERVED. 9

Elements of an Investment Policy Statement for Individual Investors

Descriptions and benchmarks for subclasses may be identified in the IPS or

reserved for an asset allocation plan that may be attached as an appendix.

■■ Example: “The Family Trust accounts may invest in U.S. equity, U.S.
fixed-income, U.S. money market, and international developed-market
equity securities. The following benchmarks have been selected for com-
parison with each asset class: U.S. equity, Russell 3000 Index; U.S. fixed
income, Barclays Capital U.S. Aggregate Index; U.S. money market,
Lipper U.S. Government Money Market Funds Average; international
developed-market equity securities, MSCI Europe/Australasia/Far East
(EAFE) Index.

Define distribution/spending assumptions or policies. Spending or distribu-

tions from the portfolio should be defined. Often, a “spending calculus” that
reconciles investment return objectives, fees, taxes, inflation, and anticipated
spending is useful as a guide to realistic assumptions. Distributions may be char-
acterized as a percentage of portfolio market value or as a specific cash value.

■■ Example: “Based on the overall expected portfolio return of 7.5 percent,

fees of 1.2 percent, inflation of 2.8 percent, and an effective tax rate of 32
percent of total appreciation, the Linzer Trust Portfolio may support an
annual spending rate of 1.2 percent of the portfolio market value while
retaining potential for capital preservation or nominal growth.”

Define a policy portfolio to serve as a basis for performance and risk assess-
ments. An asset allocation policy should designate target allocations to each
asset class, with allowable ranges around the targets. Similar targets and ranges
may be specified for subclasses. Overall fund returns, weighted according to
strategic target allocations, may be constructed and compared with overall
actual fund performance. Similarly, some insight as to risk exposures may be
developed from examining deviations from target allocations and violations of
acceptable ranges of deviation.

■■ Example: “An asset allocation plan for the Mendez Charitable Trust is
attached as Exhibit ZZZ, and it shall be subject to periodic review and
change under the sole authority of Jose Carrios as trustee. For each asset
class, a target allocation has been established that reflects the optimized
asset allocation study conducted by Hill Counsel as investment advis-
ers; also established are allowable ranges within which actual allocations
to each asset class may vary. The investment adviser is responsible for

10 WWW.CFAINSTITUTE.ORG
 Investment, Return, and Risk Objectives

adhering to the asset allocation plan and for maintaining actual allocations
to asset classes within the ranges established. Each quarterly report by the
investment manager to the trustee shall confirm actual asset allocations as
of the end of the quarter and shall also confirm that allocations during the
quarter were within allowable ranges.”

3c. Define the risk tolerance of the investor.

The IPS should describe the investor’s general philosophy regarding tolerance for risk.
The IPS should acknowledge that the portfolio will be subject to the assumption of risk,
and have the potential for returns associated with risk to be both positive and negative
over time. Relevant risks are usually myriad and may include liquidity, legal, political,
regulatory, longevity, mortality, business, and/or health risks. In addition to specifying
relevant risks, defining acceptable paths of risk may also be important. For example, in
light of possible personal risks (i.e., loss of job, disability, life-cycle stage), “volatility” as a
descriptive measure of risk may be irrelevant beyond an absolute level of loss that would
completely derail an investment portfolio.

For individuals, assessing risk tolerance may be difficult and subjective. Where possible,
the IPS should account for known liabilities to lend some quantitative basis to the risk
tolerance assessment. Individual investors may also require an assessment of their intel-
lectual and emotional tolerance for potential losses associated with risks; for these assess-
ments, interviews or questionnaires can be used. More nuanced approaches may attempt
to define multiple levels of risk associated with avoiding financial catastrophe, maintain-
ing a current standard of living, meeting a specific future financial goal, or developing
significant further wealth. The results of this sort of analysis may suggest boundaries for
tolerance for risk and associated policies (for example, stop-loss or rebalancing policies.)
Such policies may be incorporated in an appendix.

■■ Example: “James and Jennifer Jensen understand that the very nature of risk is uncer-
tainty about the future—specifically, uncertainty as to future investment returns. The
Jensens seek to generate investment returns that are proportional to the risks assumed
in the Family Trust portfolios. Tower Capital, as investment adviser, seeks to imple-
ment an investment strategy that balances the need to build the Family Trust assets as
stated in the objectives identified in the 2009 Financial Plan with the risks associated
with that strategy. Based on the 12 April 2009 Risk Assessment interview with James
and Jennifer Jensen, Tower Capital understands that an absolute loss in any 12-month
period of more than 33 percent is intolerable. At that threshold, therefore, policies and
procedures to minimize risk of further loss should be implemented by Tower Capital.”

© 2010 CFA INSTITUTE. ALL RIGHTS RESERVED. 11

Elements of an Investment Policy Statement for Individual Investors

3d. Describe relevant constraints.

Investors must address a variety of constraints that affect their investment programs. Such
constraints may reflect legal or regulatory imperatives or internal policies. Often, such
constraints are closely linked to particular risks that are relevant to the investor.

Define an evaluation horizon for achievement of performance objectives.

Although relatively short time periods may be used for monitoring performance,
establishing a minimum time horizon for achievement of performance objectives
clarifies when action may be needed to resolve underperformance issues.

■■ Example: “The investment adviser will provide the Family Trust trustees
with a quarterly report that summarizes the performance of each invest-
ment manager, each asset class, and the Family Trust in its entirety.
Although such quarterly reports are essential for monitoring purposes,
evaluation of relative success in achieving investment objectives will be on
a rolling eight-quarter basis.”

Identify any requirements for maintaining liquidity. Investors may have

short- or medium-term needs for cash that should be specified in the IPS if
they are ongoing requirements.

■■ Example: “All dividend and interest income will be transferred to the

James Jensen checking account at the end of each month. In addition, up
to 15 percent of the market value of the portfolio should be invested in
such a way that it can be liquidated upon five days’ notice without suffering
capital depreciation.”

Identify to what extent, if any, tax considerations will affect investment

decision making. In some instances, the tax consequences of an investment
decision may significantly change the desirability of the proposed transaction.
The investor’s general tax situation and specific tax issues should be accounted
for in the IPS.

■■ Example: “In general, the investment policy will be for the Wen portfo-
lios to invest for appreciation in the taxable individual accounts and invest
for dividend and interest income in the individual retirement accounts. In
addition, the investment adviser shall consider tax-loss harvesting of exist-
ing high-basis holdings as transactionsin similar industries or sectors are

12 WWW.CFAINSTITUTE.ORG
 Investment, Return, and Risk Objectives

considered, secondary to the primary investment objective of the purchase/

sale decision.”

Identify any relevant legal constraints.

■■ Example: “Management of the Aquilla Family Foundation account is sub-

ject to the provisions of the Uniform Prudent Investor Act.”

Specify any policies related to leverage. The ability to leverage portfolios may
be constrained by policy or a relevant statute. Any such constraint should be
identified in the IPS. In addition, to the extent that different manager portfo-
lios and/or different asset classes have different leverage allowances, account-
ability for monitoring overall leverage should be defined.

■■ Example: “At the discretion of Tower Capital as investment manager, the

Xie Weng portfolio may be margined up to 50 percent of its value.”

Identify any restrictions on investment in foreign securities or invest-

ments. Some investors choose to limit their exposure to investments out-
side their home country because of economic or investment reasons; others
choose to impose constraints on such investments to manage administrative
burdens and costs.

■■ Example: “Investments in issuers of securities that are not denominated in

yen and/or are not traded on the Tokyo Stock Exchange shall be limited
to those available by participation in commingled trusts that are custodied
domestically and denominated in yen.”

If relevant, specify a policy on foreign currency management. If investments

in foreign assets are permissible, the IPS should address management of for-
eign currency.

■■ Example: “To the extent that payments of interest, dividends, or princi-

pal occur in any currency other than the Canadian dollar, the investment
adviser will be responsible for arranging conversion of the foreign currency
to Canadian dollars immediately upon receipt at the prevailing spot rates.”

© 2010 CFA INSTITUTE. ALL RIGHTS RESERVED. 13

Elements of an Investment Policy Statement for Individual Investors

3e. Describe other considerations relevant to

investment strategy.
State the investment philosophy. The IPS should document the investor’s
philosophical approach to investing, which may include such dimensions as
market efficiency; the degree of opportunism anticipated; and so on.

■■ Example: “James and Jennifer Jensen have as a philosophical basis for

investment the conviction that many segments of domestic equity mar-
kets are efficient and thus active management of such assets is unlikely
to add value net of investment costs beyond the short term. James and
Jennifer Jensen believe that some equity market segments (including
global equity markets of stocks with market capitalizations of less than
US$250 million) are relatively inefficient and that active management
strategies may be applied profitably in these segments. Furthermore,
James and Jennifer Jensen believe in a long-term orientation for their
investment program and do not intend to seek to exploit investment
opportunities that may exist in the very short term because they believe
they cannot profitably do so consistently.”

Identify a proxy-voting policy. The ability to exert shareowner rights may

contribute to the value of investments. A policy for establishing responsibility
and processes for proxy voting should be specified in the IPS, although the
detailed policy may be reserved for an appendix. Generally, the adviser and/or
the investor will retain responsibility for proxy-voting decisions, but other par-
ties (such as brokers, custodian banks, or consultants) may also have roles that
should be acknowledged in the IPS.

■■ Example: “Tower Capital, as investment adviser to the Family Trust, shall

be responsible for voting all proxies in a timely manner in a way that maxi-
mizes the value of the Trust’s underlying investments. Upon timely noti-
fication to Tower Capital, the Family Trust trustees may provide voting
instructions to be executed.”

Identify constraints on participation in securities lending programs.

Securities lending programs offer investors incremental income on their port-
folios. Participation in such programs does create some degree of collateral
investment and counterparty risk, however, and a policy should be set forth
governing participation.

14 WWW.CFAINSTITUTE.ORG
 Investment, Return, and Risk Objectives

■■ Example: “Except for the margin account established at GGG Securities,

no Charitable Remainder Trust securities shall be lent or otherwise
hypothecated or pledged as collateral.”

Identify special factors to be used in including or excluding potential

investments from the portfolio. Investors may choose to impose limits on
certain investments because they believe extra-financial factors affect security
prices, they desire to avoid concentrated risks in a particular industry, or they
wish to follow a philosophical or political orientation. In particular, attention
to Environmental, Social, or Governance ESG factors to screen investments is
increasingly common. Islamic clients may choose to restrict investment activity
to Shariah-compliant investments. The use of ESG or other criteria should be
explicitly allowed or disallowed in the IPS.

■■ Example: “Consistent with her personal beliefs, Jennifer Jensen requires

that no investments be made for her account in companies that derive rev-
enue from products or services that are contrary to the teachings of the
Catholic Church. The investment adviser shall be responsible for reviewing
the portfolio monthly to assure that this requirement is satisfied and shall
immediately dispose of any portfolio holding found to be in violation of
this policy.”

© 2010 CFA INSTITUTE. ALL RIGHTS RESERVED. 15

4. Risk Management
4a. Establish performance measurement and
reporting accountabilities.
The IPS should establish an objective, reliable mechanism for reporting investment
performance.

■■ Example: “Hill Counsel, as investment adviser to the Charitable Remainder

Trust, shall calculate the performance of each investment account under its
supervision and report performance to the trustees by the 15th day of the new
quarter. Calculations shall be consistent with the Global Investment Performance
Standards published by CFA Institute. Hill Counsel shall also provide a recon-
ciliation of the firm’s records with the brokerage statement provided by CCC
Brokerage as part of the performance report.”

4b. Specify appropriate metrics for risk

measurement and evaluation.
Consistent use of metrics to assess and evaluate the risk profile of investment portfolios is
important for meaningful comparisons to be made over time. Inappropriate use of differ-
ent metrics to highlight or disguise certain risks should be avoided. There is reasonable
debate over the suitability of various metrics, however, so continued review of the metrics
being used and metrics that are available is recommended.

■■ Example: “In addition to performance reporting, Tower Capital shall report to the
Marcel Family Trust trustees on a quarterly basis the following risk metrics: (1) risk
calculated as the annualized standard deviation of portfolio returns relative to each
portfolio’s specified benchmark and (2) the information ratio for each portfolio based
on annualized returns for the portfolio and benchmark as of the end of each quarter.”

16 WWW.CFAINSTITUTE.ORG
 Risk Management

4c. Define the process for rebalancing portfolios to

target allocations.
Outside boundaries of acceptable variations from targets (or some other target rebalancing
point) should be documented in the IPS. The rebalancing mechanism may be integrated
with the risk management system, in which case, a brief description in a separate appen-
dix of the rebalancing policy with reference to the risk management process is appropri-
ate. If the policy is not to rebalance, this policy should be documented in the IPS.

■■ Example: “On the first business day of each new quarter, the investment adviser
for the Jensen personal accounts shall propose rebalancing transactions to return
the accounts to their target allocations and shall execute these transactions within
two business days of receiving authorization from the Jensen Family Investment
Committee, except that if the principal value of a proposed rebalancing transaction is
less than $50,000, that rebalancing transaction shall be deferred indefinitely.”

© 2010 CFA INSTITUTE. ALL RIGHTS RESERVED. 17

 CFA Institute
AUTHORS

Kurt N. Schacht, JD, CFA James C. Allen, CFA

Managing Director Head
Standards and Advocacy Capital Markets Policy
Americas
Robert W. Dannhauser, FRM, CAIA, CFA
Director
Advocacy Outreach

VOLUNTEERS

Nancy H. Bertrand, CFA Stephan Illsinger, CFA

Citi Private Bank Swiss Life Germany

Charlotte B. Beyer Samuel B. Jones, Jr., CFA

Institute for Private Investors Retired, Trillium Asset Management Corp.

Peter Brennan, CFA Frederic P. Lebel, CFA

Damel Investors LLC HFS Hedge Fund Selection S.A.

Daniel P. Broby, FSIP Aaron H.W. Low, PhD, CFA

Silk Invest Lumen Advisors, LLC

Denise M. Farkas, CFA Tim McCafferty, CFA

Sigma Investment Counselors McCarthy Tetrault, LLP

Niall J. Gannon Raymond F. Orr, CFA

The Gannon Group at Morgan Stanley Stanley Financial Services
Smith Barney
Charles B. Grace III Yasuhiro Oshima, CFA
Family Office Exchange, LLC Barclays Capital Japan Limited
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