GIPS Compliance & Verification FAQ
The decision to pursue compliance with the Global Investment Performance Standards (GIPS®) and receive an independent verification is not always a simple choice. There are many moving parts within a firm’s compliance framework, and thus there are a number of important considerations that must be made before a firm can attain compliance with the GIPS standards. In the following, we describe a few of the most common questions that firms often ask as they consider taking on this initiative:
Why become GIPS compliant and verified?
Some of the primary reasons that firms consider compliance and verification are:
- GIPS compliance offers a globally accepted ethical framework for calculating and presenting investment performance and many firms value the internal and external assurances that the GIPS standards provides.
- Many institutional investors require or recommend GIPS compliance in order to be eligible to compete for various investment mandates. The latest joint survey by eVestment and ACA showed that 65% of respondents would exclude a manager from a search if they do not claim compliance with the GIPS standards. If a firm wants to compete for institutional mandates, then claiming compliance with the GIPS standards will likely be a vital element of their marketing strategy.
- Several of the largest third-party investment platforms require firms to be GIPS compliant and verified to market their performance through their online platform.
What are the common hurdles to claiming compliance with the GIPS standards?
Typically, the following items are the most common issues that firms face when working towards GIPS compliance and verification:
- Some firms find that they do not have access to the systems to support or scale their claim of compliance. The majority of our clients utilize a portfolio accounting system, composite management system, and CRM to support and maintain their firm’s claim of compliance.
- Lack of books and records to support performance, composite membership, and assets under management (AUM)
- General composite construction issues, such as aligning composite definitions with products, deciding whether to define composites narrowly or broadly, and ensuring that all terminated accounts have been included in composite performance.
- Absence of key personnel overseeing the initial and ongoing project, as well as the lack of buy-in and “push” from management.
What kind of time and resource commitments are to be expected?
Key determinants of how long the process may take include the firm’s resources to dedicate to the project, the quality of the books and records, the accounting system(s) used to calculate performance, and the volume and integrity of the underlying data to review. From a man-hour perspective, that can vary tremendously based on the aforementioned variables. Large organizations may have entire teams dedicated to the project, whereas smaller firms may have a single individual that is responsible for ensuring compliance with the GIPS standards. In most cases, compliance and verification can be achieved within a matter of a few months or less.
What is the process of becoming independently verified?
We have developed a two-phase process for firms attaining GIPS compliance and undergoing verification for the first time. First, we begin with a gap analysis and critical issues assessment of the firm to identify any hurdles or roadblocks to becoming compliant. At this point, we are able to provide focused consulting and guidance on best practices while the firm develops their GIPS standards policies and procedures manual, constructs composites, and creates GIPS Reports. Throughout this process, the firm will also need to provide books and records to support that their policies and procedures have been followed consistently. The second phase covers the actual verification process. Broadly speaking, a firm-wide verification will provide 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.
What types of firms are claiming compliance with the GIPS standards and getting verified?
We provide ongoing GIPS standards verification services to over 1,000 organizations from around the world. Our clients include traditional investment managers, credit, hedge fund, real estate, and private equity managers, as well as asset owners. The diversity of our client base is something that we are very proud of and contributes to our value proposition. We have helped firms of all sizes come into compliance from start-ups to multinational banking institutions. We are excited about the 2020 GIPS standards and the prospects of working with an entirely new pool of advisors that these revisions have attracted.
When is a firm ready for GIPS compliance?
Every firm is different, so this is a tricky question to answer. It will often depend on a company’s marketing goals and what other projects they may have in the pipeline, but we typically advise firms to become GIPS compliant sooner than later! For most asset managers, the GIPS standards require a firm first claiming compliance to bring an initial five years of performance into compliance or go back to inception if the firm is less than five years old (firms defined as asset owners have a ‘one year’ exemption). Therefore, firms that are less than five years old are creating more upfront work by waiting. Additionally, due to the requirement that all discretionary, fee-paying, segregated accounts and pooled vehicles offered as separate account strategies must be included in at least one composite, firms will find it more difficult initially to establish a compliant track record as they grow and become more complex by adding clients and developing new strategies.
What performance measurement systems do we need to claim compliance?
Recognizing that no two firms are alike, in general a firm should expect to invest in and maintain some type of portfolio accounting mechanism with the ability track standard portfolio related activities. One approach may be a spreadsheet-based system with inputs sourced from a third-party custodian. A more sophisticated framework may include a web-based portfolio accounting system that concurrently acts as the firm’s composite management system tracking portfolio movements in and out of composites. An experienced verification firm will be able to help asset managers navigate the breadth of software options and point out best practice system settings.
We want to claim compliance, but only manage funds. What is the process like for us? Do we still need composites?
Firms that primarily manage pooled vehicles often question the value in claiming GIPS compliance. Historically, the GIPS standards required that all portfolios under a firm’s umbrella be placed in at least one composite. The revamped 2020 GIPS standards eased this requirement which undoubtedly benefited fund focused managers. Fund managers will generally have the same requirements as a firm managing a mix of segregated and pooled accounts, such as documenting policies, but will be able to leverage the audited aspect of the funds to support the performance track record. Firms with a well performing fund will have the option to create a single-fund composite to market to prospective large, segregated account mandates by sovereign wealth or pension funds in the future.
How we help
We have helped many firms in their efforts to claim compliance with the GIPS standards. For more information or questions, please reach out to your ACA consultant or contact us below.
About the authors
Manny Batalla, CIPM is a Principal Consultant with ACA’s performance services division. Manny leads our GIPS compliance consulting and verification projects with investment managers in the United States and abroad. Prior to ACA, Manny’s background includes investment operations, tax, and non-profit finance. Manny earned his Bachelor of Arts degree in Business Administration with a concentration in Finance from Portland State University. He is a member of the CFA Institute and CFA Society of Portland. Manny is based in Portland, OR.
Jamie Stewart, CIPM is a Director with our performance services division. Jamie has worked in the investment performance industry since 2012 and specializes in working with advisors to understand ACA’s service offerings and how they align with their goals. Jamie earned a Bachelor of Science degree in Business Administration with a minor in Marketing and MBA from Southern Oregon University. He also earned his CIPM in in 2017. Jamie is also based in Portland, OR.