The decision to pursue GIPS® compliance and 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. No two firms will have the same experience when it comes to claiming GIPS compliance and going through an independent third-party verification. In the following, we describe a few of the most common questions that firms often ask:
1) Why become GIPS compliant and verified?
There are four primary reasons why firms should become compliant and verified:
- The desire to adhere to an ethical framework for calculating and presenting investment performance provides greater internal and external assurances that the firm has a strong compliance culture.
- The majority of institutional investors want investment managers to be GIPS compliant. The latest joint survey by eVestment and ACA Performance Services 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 market any investment products to institutional investors, then claiming GIPS compliance should be a vital element of the marketing strategy.
- A recent trend of third-party platforms is to require firms to be GIPS compliant and verified in order to market their performance through their online platform.
- Compliance with the GIPS standards leads to enhanced internal controls and documented policies and procedures related to the calculation and presentation of investment performance.
2) What are the common hurdles?
Typically, the following items are the most common issues that firms face when working towards GIPS compliance and verification:
- 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
- Performance calculation issues like a firm’s ability to revalue accounts for large cash flows
- Absence of key personnel overseeing the project to its completion, and the lack of buy-in and “push” from the top
3) 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 used to calculate performance, and the amount of 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.
4) What is the process of becoming independently verified?
ACA Performance Services has developed a two-phase process for firms attaining GIPS compliance and undergoing verification for the first time. ACA begins with a gap analysis and critical issues assessment of the firm to identify any hurdles or roadblocks to becoming compliant. At this point, ACA is able to provide focused consulting and guidance on best practices while the firm develops their GIPS policies and procedures manual, constructs composites, and creates GIPS-compliant presentations. Throughout this process, the firm will also need to provide books and records to support that their GIPS policies and procedures have been followed consistently. The second phase covers the actual verification process. Broadly speaking, a firm-wide verification will confirm a) if the firm has complied with all the composite-construction requirements of the GIPS standards on a firm-wide basis, and b) if the firm’s processes and procedures are designed to calculate and present performance results in compliance with the GIPS standards.
5) What types of firms are claiming compliance with the GIPS standards and getting verified?
ACA provides ongoing GIPS verification services to over 1000 organizations from around the world. Our clients include traditional investment managers, credit, hedge fund, real estate and private equity managers, and asset owners. The diversity of our client base is something that we are very proud of and also contributes to our value proposition. We have helped firms of all sizes come into compliance from start-ups to multinational banking institutions. Our clients represent all asset classes and distribution models from equities to private equity and direct real estate. We are very excited about the proposed changes upcoming in GIPS 2020 and the prospects of working with an entirely new pool of advisors that these revisions will attract.
6) 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 5 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 fee-paying discretionary accounts 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.
If you would like more information about ACA Performance Services and/or GIPS consulting and verification, please feel free to contact Christie Horsman or Jason Millard. We would be happy to answer any questions you have about the process.
About the Author
Jamie Stewart, CIPM, is a Client Development Associate with ACA Performance Services, a division of ACA Compliance Group. 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’s of Science degree in Business Administration with a minor in Marketing and an M.B.A. from Southern Oregon University and earned his CIPM in in 2017. He is based in ACA's Boston office.