Q: What are the GIPS Standards?
A: The GIPS standards are a set of standardized, industry-wide ethical principles for calculating and presenting investment performance that investment management firms can voluntarily elect to adhere to. The GIPS standards are based on the fundamental principles of fair representation and full disclosure of investment performance results. The GIPS standards were created and are sponsored by CFA Institute through the collaboration of the global investment community. Global standardization of investment performance reporting gives investors around the world the transparency necessary to compare and evaluate investment managers. Among other things, firms that comply with the GIPS standards are required to implement consistent policies and procedures related to the aggregation of similarly managed accounts into composites, the calculation of performance results, and the creation of standardized performance presentation materials (referred to as GIPS Reports), culminating in the delivery of those materials to all of the firm’s prospective clients and investors.
For more information, visit gipsstandards.org.
For a copy of the 2020 edition of the GIPS standards, click here.
Q: What does it mean to claim compliance with the GIPS standards?
A: Claiming compliance with the GIPS standards signifies a commitment by an investment management firm to adhere to all of the established guidelines and requirements set forth by the GIPS standards. These standards are designed to ensure that investment firms calculate and present their investment performance in a consistent and comparable manner, enhancing transparency and facilitating fair competition in the investment industry.
Q: Is compliance with the GIPS standards required?
A: No, compliance with the GIPS standards is not mandatory or required by law or regulation. However, it is generally expected in many markets and has become a de factor requirement for investment management firms to win new mandates, especially those that serve the institutional marketplace. Non-compliance can lead to lost business opportunities, lost revenue, constrained growth, and possible increased scrutiny from regulators.
Q: Why would a firm claim compliance with the GIPS standards:
A: There are many reasons why a firm would choose to comply with the GIPS standards, including:
- A desire to follow best practices
- To improve internal controls and implement consistent policies and procedures
- To ease comparability with other investment managers
- Competitive advantage & credibility
- Global acceptance
- Pressure from clients, prospects, and consultants
Q: What is a composite?
A: A composite is an aggregation of similarly managed portfolios and/or funds that have a similar investment mandate, objective, or strategy. Portfolios and funds included in a composite must be discretionary, meaning the investment decisions are made by the firm without client direction. A composite can include one or more portfolios or funds.
Q: Can a firm pick and choose which composites are GIPS compliant?
A: No. The GIPS standards must be applied on a firm-wide basis. While there is generally some flexibility in the “definition of a firm” from a GIPS perspective, compliance with the GIPS standards is an “all or nothing” approach, meaning firms cannot select which portfolios/composites they wish to claim compliance on. Further, firms must not select which provisions of the GIPS standards they choose to comply with; all of the required provisions must be followed, if applicable.
Q: What are the requirements in presenting net performance from a GIPS perspective?
A: Under the GIPS standards, composite net-of-fees returns must reflect the deduction of transaction costs and investment management fees. Additional fees and expenses other than investment management fees and transaction costs may be deducted from net-of-fees performance but doing so triggers additional disclosure.
Firms have the following options for calculating net-of-fees composite results:
- Using actual fees
The use of actual fees is appropriate in most circumstances as they reflect the true fees that were charged to clients during the time periods presented and represent the real returns that were achieved. However, there are potential issues with the issue of actual fees. If a composite includes portfolios that are not charged investment management fees (non-fee-paying accounts) or where fees are charged but they are not debited from the portfolio included in the composite (e.g., fees are paid externally or out of a different portfolio), then actual net-of-fees returns may be overstated. Actual net-of-fees results are also subject to the risk that errors that occur at the portfolio level related to fees will also impact composite results (e.g., if fees are not properly booked to a portfolio). Additionally, in situations where the fees currently offered to prospective clients are higher than those that were charged historically or the fee structure being offered is different from that of portfolios included in the composite (e.g., wrap vs. non-wrap), actual net-of-fees returns may not accurately reflect what the prospective client’s experience would have been if they had been invested in the composite strategy.
- Using model fees
When a model fee is applied to calculate composite net-of-fees performance, the model fee must:
- Be appropriate to prospective clients, and
- Produce returns that are equal to or lower than those that would have been calculated using actual investment management fees.
Q: What are the requirements to use the GIPS standards trademark?
A: Firms that claim compliance with the GIPS standards have the option of including the GIPS Trademark in marketing materials provided they follow specific guidelines. For more information on using the GIPS trademark, click here.
Q: What is the SEC Marketing Rule?
A: The SEC Marketing Rule is designed to protect investors by ensuring that advertisements and communications from investment advisers are truthful, accurate, and not misleading. Key aspects of the SEC Marketing Rule include:
- Prohibition Against False or Misleading Statements: Advisers must not make any false or misleading statements in their advertisements or other communications.
- Prohibition Against Cherry-Picking: Advisers must present their performance results in a fair and balanced manner, avoiding the selection of specific favorable periods (cherry-picking) without disclosing less favorable periods.
- Use of Testimonials: The rule allows the use of testimonials (statements by clients regarding their experiences) under certain conditions, including disclosing whether the testimonial was provided by a client who received specific types of advisory services.
- Presentation of Performance: Advisers must present performance results net of fees and expenses. Timelines for the presentation of performance are also standardized and require 1-year, 5-year, and 10-year return periods (or since inception if not applicable).
- Books and Records: The SEC Marketing Rule mandates that advisers maintain copies of their advertisements and communications for a specified period, facilitating regulatory oversight.
- Compliance Policies and Procedures: Advisers are required to establish, maintain, and enforce policies and procedures reasonably designed to ensure compliance with the SEC Marketing Rule.
- The SEC Marketing Rule aims to promote transparency and integrity in how investment advisers communicate with current and prospective clients. By setting standards for advertising practices, the SEC Marketing Rule helps investors make informed decisions about investment advisers and their services.
For more information click here.
Q: Who does the SEC Marketing Rule apply to?
A: The SEC Marketing Rule applies to all investment advisers that are either registered or required to be registered with the U.S. Securities and Exchange Commission (SEC). These are firms that manage assets for clients and provide investment advice in exchange for compensation. For more information click here.
Q: What is a GIPS verification and does Guardian Performance Solutions LLC offer this service?
A: Verification is the process by which an independent third-party verification firm (verifier) conducts testing of a firm on a firm-wide basis in accordance with the required verification procedures of the GIPS standards. Verification provides assurance on whether the firm’s policies and procedures related to composite and pooled fund maintenance, as well as the calculation, presentation, and distribution of performance, have been designed in compliance with the GIPS standards and have been implemented on a firm-wide basis. Verification does not provide assurance on the accuracy of any specific performance report.
Firms that claim compliance with the GIPS standards are not required to be verified by an independent third-party, though the value of verification is widely recognized and being verified is considered to be best practice. It is also worth noting that if a firm chooses to forgo GIPS verification, they must explicitly disclose this as part of the required GIPS compliance statement found in GIPS Composite Reports.
Guardian Performance Solutions LLC does not offer verification, which frees us from independence concerns and allows us to take a hands‐on approach to developing, implementing, and managing a firm’s GIPS compliance process.
Q: What is the CIPM designation?
A: The Certificate in Investment Performance Measurement (CIPM) designation is administered by the CFA Institute and is the investment industry’s only credential dedicated to investment performance analysis and presentation.
For more information, click here.