Investment Policy Statement: Make the Rule Before the Cash Call

An investment policy statement (IPS) is the written rulebook for a portfolio: what the money must accomplish, which risks the family will accept, who may act, and how an exception is approved. Its value is tested when a decision arrives before a committee meeting—not when the document is signed and filed.

The IPS must work across legal entities, spending needs, private-fund commitments and delegated managers. This guide gives a copyable structure and tests it against a fictional US$600,000 capital call. The example's allocation and authority thresholds are illustrative, not recommended settings for another family.

01What an IPS must decide

The CFA Institute's IPS elements for individual investors organize the document around scope, governance, objectives, constraints, asset allocation, risk management, monitoring and review. That is a useful framework, not a mandatory private-family-office form. A public family foundation IPS likewise names the covered entities, board responsibilities and allocation exhibits; its charitable mandate does not automatically apply to a private family.

An effective family-office IPS answers seven questions:

• Scope: Which legal entities and accounts are covered, and which sit under separate mandates?
• Purpose: Which spending, preservation, growth and intergenerational goals take priority when they conflict?
• Liquidity: How much must be available, at which entity, by which dates, after commitments and restrictions?
• Risk and allocation: Which exposures, concentration limits, target ranges and illiquid commitments are permitted?
• Authority: Who proposes, approves, trades, transfers and verifies a decision; which rights may a manager exercise without the family?
• Exceptions and reporting: What triggers escalation, what evidence is retained, and which report shows compliance or breach?
• Review: When is the IPS revisited, and who can amend it?

These are governance choices, not simply an asset-allocation pie chart. “Maintain liquidity” is not actionable until the office defines the paying account, the floor, the forecast horizon, the trigger and the person who may release funds. Keep account-by-account payment instructions in a controlled operating procedure; the IPS should name the authority and test that the procedure must satisfy.

02Start with scope, purpose and liquidity

Begin with an inventory of entities, beneficial owners, accounts, liabilities, expected distributions and contractual calls. Write the IPS's scope beside that inventory. A trust, family investment company and foundation may share advisers yet have different legal powers or spending obligations. Counsel and tax advisers should check the governing instruments and applicable duties before the IPS assigns authority; the IPS cannot grant powers an entity does not have.

Then translate the family's purpose into constraints. The office might need predictable spending for two years, a longer growth pool, a pool reserved for philanthropic grants and capacity for existing private commitments. Decide which need is a hard liquidity floor and which is a preference that can be reconsidered. A market value or expected distribution is not the same as cash in the paying account.

For near-term liquidity, the policy can require a dated cash projection by legal entity, a stated minimum balance and a stress test that removes unconfirmed receipts. For long-term capital allocation, maintain a separate pacing plan for outstanding fund commitments and likely follow-on needs. UBS's family-centered IPS guide treats time horizon, liquidity needs, objectives and rebalancing as connected inputs. The family's own records and signed commitments determine the actual amounts.

03Set allocation, authority and exceptions

Give each investable pool a strategic allocation and permitted range, with a method for measuring exposure. Name whether private assets use last approved NAV, cost or another policy basis; stale values should be flagged rather than silently mixed with current market prices. State how leverage, single-manager concentration, related-party investments and currency exposures are assessed where relevant.

Authority belongs in a decision map, not a vague sentence that “the family office may rebalance.” A policy might allow a delegated manager to trade within approved bands while reserving new illiquid commitments, loans, related-party deals and changes to policy limits for a committee. The actual roles depend on entity documents and contracts.

For each decision class, specify:

1. Trigger: What observed value, notice or forecast prompts action?
2. Proposer and reviewer: Who prepares the evidence, and who checks risk, tax and entity constraints?
3. Approver: Who may authorize the size and type of transaction?
4. Executor and verifier: Who places the order or payment, and who confirms settlement and the updated report?
5. Exception: What happens if a limit must be exceeded temporarily, who may grant it, for how long, and how is it reported?

The IPS should separate rebalancing because an allocation moved from raising cash for a known obligation. Both can change holdings, but the authority, timing and tax-lot review may differ. It should also prohibit a silent override: if a rule is impractical during a market disruption, record the exception and amend the policy through its named process rather than pretending compliance. A policy exception may relax only a limit the named body is empowered to waive; it cannot override a fund notice, an entity's legal powers or another external obligation.

04Test the policy against a $600,000 call

Assume a fictional family investment entity reports a US$10 million portfolio: US$5.5 million public equities (55%), US$2.5 million bonds (25%), US$1.5 million private assets (15%) and US$0.5 million cleared cash (5%). A valid existing private-fund capital call of US$0.6 million is due in 30 days. For this simplified calculation, there are no other cash flows, trading costs or market movements.

The entity's illustrative IPS requires at least US$0.4 million of available cash after known payments. Its public-equity target is 50%, with a 45%–55% permitted range. A separate authority schedule requires investment-committee approval for a sale decision above US$250,000, aggregated across related orders so it cannot be split into smaller tickets to avoid review. These are invented rules for this example.

The US$0.6 million call is payment of an existing obligation, not permission for a new commitment. Paying it does not automatically increase the fund's reported NAV by US$0.6 million; the valuation and accounting bases require separate treatment. Nor does an equity sale automatically satisfy the IPS if transaction costs, taxes or market movement leave less than the floor. The final sale amount and funding route must be recomputed from executable quotes and the dated cash forecast.

The sale brings equities to US$5.0 million, 50% of the original US$10 million portfolio before the call. After the call, the equity weight depends on the approved value of the private holding. If no additional private value is recognized immediately and all else is unchanged, reported assets are US$9.4 million and equities are about 53.2%. If US$0.6 million is recognized in the private holding under the applicable basis, reported assets remain US$10 million and equities are 50%. Neither treatment follows automatically from the payment. The office must use its valuation date and policy basis to retest the 45%–55% band.

This case tells the policy writer where generic wording fails. “Rebalance annually” does not resolve a call due in 30 days. “Keep five percent in cash” does not tell treasury whether it may use that cash below a US$400,000 floor. A complete IPS gives a trigger, authority route, settlement test and escalation before the deadline.

05Write a concise IPS starter and decision record

Use the following concise drafting form, not a signed policy, guaranteed one-page printout or universal allocation. Each blank needs an owner, evidence source and review date. Attach detailed schedules only where they change a decision.

1. Investor and coverage. “This IPS applies to [legal entities/accounts] and excludes [assets/mandates governed elsewhere]. [Named body] owns amendments; [named person] maintains the current version.”

2. Objectives and constraints. “The portfolio supports [spending/growth/preservation priorities] over [horizons]. Known obligations include [payments and commitments]. Liquidity must remain at or above [amount or method] in [specified entities/accounts] under [defined stress].”

3. Strategic allocation and limits. “For each pool, target [asset classes] within [ranges]; measure [private asset valuations and look-through exposures] on [source/date basis]. Limit [concentrations, leverage or other material exposures] to [approved rule].”

4. Authority. “The [preparer] proposes; [risk/tax/entity reviewers] assess; [approver] authorizes transactions over [threshold]; [executor] trades or pays; [independent verifier] confirms settlement and reporting.” Delegation is subject to entity documents and manager contracts.

5. Rebalancing and exceptions. “Review bands [frequency] and when [trigger] occurs. Use [permitted funding/order sequence] after considering liquidity and tax lots. An exception requires [approver], [reason/evidence], [expiry] and [reporting date]; an expired exception returns for approval.”

6. Monitoring and amendment. “Report [allocation, liquidity, risk, performance and exceptions] to [body] every [period]. Revisit this IPS [schedule] and after [material change]. Record version, approval date and superseded text.”

An IPS also needs implementation exhibits: current accounts, fund commitments, benchmark or performance measures, delegated-manager mandates and the exact threshold schedule. Keep sensitive account and family details in controlled attachments with authorized access.

Filled decision record for the fictional call:

• Trigger and payer: Existing US$0.6m fund call due in 30 days from the fictional family investment entity; exact payment cutoff comes from the notice.
• Funding test: At least US$0.5m net settled cash is needed to preserve the US$0.4m floor under the simplified forecast. Actual gross sale and any cushion await price, cost and tax review.
• People: Investment lead proposes; tax and treasury review; investment committee approves the sale decision above US$0.25m; trading owner executes; treasury verifies bank arrival and the post-payment balance.
• Deadline and status: Latest approval/trade dates remain unknown until notice cutoff and settlement path are checked. Current status is hold, not permission to trade or pay. If this route misses its cutoff, the committee chooses another permitted funding path and records any policy exception within its authority.
• Evidence: Retain the call notice, dated cash forecast, tax-lot review, approval, trade confirmation, bank settlement, payment confirmation and any exception record.

06Review the policy without rewriting it for every market move

The policy should survive ordinary price swings. Monitor bands, liquidity and exceptions at its stated cadence, but amend the IPS when family objectives, entities, spending, risk capacity or delegation materially changes. A temporary trade outside a band should be recorded as a time-limited exception when the policy allows it; it should not quietly become a permanent new target.

At each review, test one recent action against the written authority chain: source/trigger, proposal, review, approval, execution, settlement, compliance report and any exception expiry. If the records cannot show that chain, revise the operating process or the policy. A document that cannot be applied to a real capital call or rebalance is unfinished, even if every standard heading is present.

07Frequently asked questions

1Is an IPS legally required for every family office?

No single IPS form applies to every family office. Legal, fiduciary and contractual duties vary with entities, roles and advisers. The IPS is an internal governance tool; counsel should confirm applicable requirements and whether governing documents permit the proposed delegations.

2How often should an investment policy statement change?

Set a scheduled review and event-driven triggers, then document amendments through the named approval body. A market move may trigger rebalancing or an exception without changing the family's long-term policy. A new entity, spending need or mandate may require a substantive amendment.

3Can a family office use one IPS for all its entities?

A common framework may be useful, but each covered entity's authority, obligations and investment restrictions must be identified. Separate schedules or policies may be necessary when a trust, foundation, operating company and investment vehicle have different mandates.