A written document recording the objectives of a portfolio and the constraints within which they must be pursued, including time horizon, liquidity needs, tax position, legal and regulatory factors and unique circumstances such as religious or values-based restrictions. Recording a restriction here is what makes it implementable and reviewable by any manager who later handles the account.
Practice questions using Investment Policy Statement
Original questions written against the published FINRA and NASAA exam content outlines — not actual exam questions. Every choice is explained.
A client wanting professional oversight guided by a written plan is suited to:
A.An advisory relationship guided by an IPSCorrect - professional plan and oversight.
B.A savings accountA savings account is a deposit product with no securities oversight and no investment plan behind it. The client is asking for ongoing professional management, which a bank deposit does not provide.
C.A self-directed account with no planSelf-directed means the client makes every decision, which is the absence of the professional oversight requested. The stem also specifies a written plan, and this choice explicitly has none.
D.A single stockA single stock is one holding, not a managed relationship or a plan. It also concentrates unsystematic risk in one company, which is what a documented allocation policy is meant to prevent.
Why: An advisory relationship guided by an investment policy statement provides oversight and a documented plan.
A client instructs her adviser that her religious observance forbids holding instruments that pay interest. In the investment policy statement, that instruction is best recorded as
A.an investment objective, since it plainly describes something the client wants from the portfolio.Wrong. It limits what may be held and states no target for return, income or growth.
B.a measure of her risk tolerance, since it reduces the opportunity set available to her.Wrong. Narrowing the universe is a limitation, not a statement about her willingness to bear loss.
C.a unique circumstance constraint that governs which securities may be selected.Correct. Recording it as a constraint is what makes it implementable and reviewable by any future manager.
D.a private matter for the client alone, and therefore outside the policy statement altogether.Wrong. A restriction that is never written down cannot be implemented or monitored by anyone.
Why: An investment policy statement separates objectives, which describe what the portfolio is meant to achieve, from constraints, which describe the boundaries within which it must be achieved. A religious restriction narrows the investable universe without saying anything about the return sought or the loss the client can bear, so it belongs among the unique circumstances that govern security selection. Recording it there makes it operative, because it can then be implemented by the portfolio manager and checked on review. Leaving it out of the document would guarantee that some future manager violates it.
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