Investment Policies: Advancing Your Business Goals
Investment policies are an important part of any business, whether large or small, as these documents govern decisions about allocating funds towards investments that support the company’s objectives. Investment policies also help minimize risk for an organization by providing a road map for making decisions about which investments to pursue and what criteria to use when evaluating options.
When establishing and implementing a policy, it is important to involve stakeholders from all departments within an organization. A comprehensive policy should reflect the overall strategy, while also taking into account needs of the individual departments. Additionally, the policy should involve a review of the regulatory environment, accounting and reporting practices and the preferences of the managers and directors involved in the decision-making process.
The most important aspect of a comprehensive investment policy is the alignment of investment objectives and policies with the company’s overall strategy. In order to do this, it’s important to consistently assess how an organization’s financial goals are likely to change over time, and to adjust the investment policy accordingly. Furthermore, the policy should set forth specific rules regarding the types of investments that can be pursued, the acceptable level of returns, the allowable level of risk, the overall mix of investments allowed, the time-frame for investing and the reporting that should take place.
Financial advisors are key in the establishment of any investment policy. They can provide valuable strategic — and sometimes tactical — guidance when setting forth objective criteria for selecting and measuring appropriately-weighted investments. Furthermore, they can help organizations make decisions about which investments to pursue and what strategies to use for making those investments. With their expertise and advice, organizations are better equipped to make sound financial decisions and become better positioned to reach their organizational goals.
In order to help guide decisions, it’s important that the policy cover specific areas. These include:
• Asset allocation: setting forth how much of a particular type of investment should be held;
• Risk tolerance: determining the acceptable level of risk an organization is willing to take;
• Performance measurement: including a mechanism for systematically measuring performance;
• Reporting: specifying when, where, and how reporting should take place;
• Diversification: specifying the types of investments to pursue and the mix of those investments for diversification purposes;
• Guidelines for monitoring investments;
• Authorization and delegation of authority to make decisions;
• Limitations on investment activity;
• Service benchmarks: setting forth standards for acceptable levels of service.
A strong investment policy allows an organization to confidently move forward into new markets, while controlling risk and contributing to the long-term success of the organization. Additionally, it allows the organization to develop trust among shareholders and other stakeholders, as they can be confident in the approach of the organization and in the selection of investments. Finally, a comprehensive investment policy helps decision-makers proceed confidently — in spite of changing markets or the pressure of short-term results.
