At the heart of any well-managed investment program is the investment policy statement (IPS). An IPS can be thought of as a “business plan” for your investment program; it describes and documents the investment management process and provides fiduciary protection.

This kind of documentation is especially important in the health care arena, where soaring costs and a variety of financial pressures make the optimal management of assets a critical and highly visible management task.

Just as a picture of a cow is not a cow, the IPS is not the investment policy itself, but rather the formal documentation of that policy.

Benefit #1: Thinking through your investment policy

The first and most important benefit of a good IPS is that it forces you to actually think through and develop your investment policy. Before you can write a business plan document, you have to have a business plan, so it stands to reason that before you write your IPS, you must actually have a policy in mind.

If that sounds obvious, simply a matter of common sense, perhaps you have not read many IPS documents. Many were clearly written in order to meet the requirement for the existence of such a document, but even a cursory reading reveals the lack of a substantive policy underneath.

The IPS can only be meaningful in the context of a high-quality investment process. The five steps in this process include:

1. Current position analysis. This is the most important step, and it must take into account the assets, the organization, the committee, the group’s investment goals, the investment time horizon, the tax issues, risk tolerance, and other issues.
   
   
2. Asset allocation. Identify projected returns and downside risk, using a Monte Carlo simulation. A thorough analysis is needed to create a diversified portfolio that fits the organization’s needs and objectives.
   
   
3. Writing the IPS itself.
   
   
4. Selection of options, including managers, mutual funds, other investments, and the custody and reporting platform.
   
   
5. Ongoing monitoring.

Having determined what the program should look like and how it ought to be managed, it is critical to document that this has been a sound process and record all decisions made. In addition, guidelines for manager selection and monitoring ought to be established (and then followed).

There are well-established formats for these documents, and every fiduciary needs to have one. It is the first thing an auditor or other interested party will want to see, and rightly so.

Additional benefits of a good IPS

Once an organization has actually followed such a process and developed a sound, documented policy, other important benefits can be enjoyed. For example:

• Transparent communication. This document communicates to all concerned, from money managers to auditors, how decisions were made and why, what goals were to be achieved, how much risk was taken, and why this was prudent. Monday-morning quarterbacking is minimized. Continuity is enhanced, as future committee members and service providers have ready access to the history of the process.
  
  
• Fiduciary protection. Beyond the regulatory requirements for the document itself, a good process well-documented is the best protection a fiduciary can have. No one can be reasonably held accountable for what the S&P 500 did during a particular period, but the fiduciary is entirely responsible, and potentially liable, for the quality of the process and the decision making.

In summary, anyone responsible for managing assets needs a good policy and a solid document, and for health care organizations, that has never been more true than it is today. If your IPS (you do have one, don’t you?) is a little dusty, or not as clear and thorough as it might be, perhaps it is time to schedule a review.

Roger C. Hewins III is president and founder of Hewins Financial Advisors and senior vice president of Wipfli Hewins Investment Advisors LLC, a joint venture with Wipfli LLP that provides financial planning and investment advisory services. He can be reached at 651.636.6463 or rhewins@wipfli.com.