Advisory Only Assets - Understanding New GIPS® Terminology

The roll-out of 2020 GIPS^® is underway and currently open for comment. One of the more confusing provisions in the exposure draft is the proposed requirement to report Advisory Only Assets separate from GIPS Firm assets.

This 2020 GIPS provision is not a big departure from prior guidance. It is important, however, to understand if you and your colleagues—and regulators—use the term “advisory only” assets differently than it is used in the 2020 GIPS Glossary. This article will define the terminology and help you assess the impact of the new terminology for your firm, if any. We’ll also line up the GIPS terminology with regulatory assets under management and provide clarifying examples.

GIPS Advisory Only Assets Defined

The 2020 GIPS Glossary defines Advisory Only Assets as: Assets for which the FIRM provides investment recommendations but for which the FIRM has no control of implementation of investment decisions and no trading authority for the assets.

Similar to current GIPS Handbook guidance, no trading authority is not to be confused with conditional trading authority, and accounts with conditional trading authority are to be included in total firm assets.

According to the new terminology, for an account’s assets to be excluded from GIPS Firm Assets, they must meet both criteria. The “no control of implementation decisions” means clients can decide if they agree/disagree with the recommendation. The “no trading authority” means that even if a client agrees with a recommendation, the firm is not involved in trading on the recommendation.

The Impact

The primary impact of the terminology change is that Guidance from the Handbook is now more prominently contained within the 2020 GIPS exposure draft.

For most firms, the new terminology won’t change their GIPS Firm assets.
Firms that will be impacted: firms with assets that meet the new GIPS Advisory Only Assets definition who include such assets currently as supplemental information.
- If GIPS Reports include separately reported Advisory Only Assets as supplemental information, firms will be able to drop the reference to supplemental.
- If GIPS Reports include GIPS Firm assets plus Advisory Only Assets as supplemental information, firms will be able to drop the supplemental label and they will be required to report GIPS Firm assets and Advisory Only Assets separately.
- For firms that manage hybrid assets, it’s probably still going to be difficult to determine a clear classification. If it was complicated enough to consult with an attorney before, it probably still is.

Lining Up With Regulatory Assets

The proposed GIPS terminology for Advisory Only Assets aligns with Form ADV instructions when reporting Part 1, Item 5 assets under management, which is a great news for CCOs at firms that define their GIPS firm as an SEC Registered Investment Adviser. The confusing part:

In ADV instructions, Advisory Only Assets that meet certain tests are referred to as assets to be included
In 2020 GIPS, Advisory Only Assets that don’t meet certain tests are referred to as assets to be excluded.

According to ADV instructions, SEC registered advisers must include advisory only assets in their assets under management reported in their ADV when advisers provide continuous and regular management services and meet additional tests. Assets where an adviser does not have legal discretionary authority over the account (an “advisory account”) are included in regulatory assets when the adviser has an “ongoing responsibility to select or make recommendations, based upon the needs of the client, as to specific securities or other investments the account may purchase or sell and, if such recommendations are accepted by the client, [the adviser is] responsible for arranging or effecting the purchase or sale.” Form ADV Instructions, Part 1A.

Examples

Two examples of Advisory Only Assets that would be required to be shown separate from GIPS Firm Assets on the GIPS Report:

Firm A: An asset manager with UMA account service agreements where the manager is providing recommendations and has neither control of whether the client agrees/disagrees with the recommendation and no trading authority even if the client agrees with the recommendation.
Firm B: An institutional investment consulting firm/pension advisor providing investment recommendations to boards and investment committees, while leaving control of the investment decisions and trading authority to the board/other service providers delegated by the board.

Two examples of Advisory Only Assets that would not be required to be shown separate from GIPS Firm Assets:

Firm B: In addition to institutional consulting, the pension advisor also provides OCIO services to institutions where it does have either control of implementation decisions (such as hiring/firing asset managers) or trading authority. While the consulting firm might have over a $1 trillion in the advisory only assets example above, the OCIO managed assets might only be $10s of millions.
- Showing combined OCIO and Advisory Only Assets would dwarf the discretionary OCIO information and not be particularly meaningful in evaluating the OCIO business line. Showing Advisory Only Assets separate from GIPS Firm assets could be useful and is recommended.
- Not all OCIO service agreements are the same. Some OCIO clients may still require recommendations be approved, and once they are, the OCIO manager executes the transaction/trades. These OCIO assets would still be included in GIPS Firm Assets because they don’t meet the test of GIPS Advisory Only Assets. They instead meet the test of conditional trading authority.
Firm C: Firm C provides institutional and private wealth management services that include non-discretionary service agreements with conditional trading authority. Firm C also to provides asset management services to clients where the firm has full trading authority.
- Portfolio Managers at Firm C provide their non-discretionary clients with continuous supervisory services over the client’s assets, call the clients when they recommend a buy/sell be made, and if the client agrees with the recommendation, the firm executes the trade.
- Even though Firm C might refer to these accounts as advisory only, they don’t meet the test for GIPS Advisory Only Assets. Instead, they are accounts with conditional trading authority and included in GIPS Firm Assets.

Examples of Form ADV, Part 1, Item 5.F regulatory assets:

GIPS and ADV Assets can diverge for reasons beyond the scope of this article. Leverage, firm definition, proposed uncalled committed capital GIPS provisions, to name a few. For most firms, though, they’re intuitively the same or very similar. It’s helpful to be able to reconcile any reporting differences that do exist, and to take away that those differences are not because of a difference in the treatment of Advisory Only Assets.

Firm A: UMA Advisory-only Assets – No GIPS Firm assets.

U.S. Dollar Amount

Discretionary: (a) $

Non-Discretionary: (b) $

Total: (c) $

Firm B: Institutional Consultant/OCIO: >$1 trillion advisory assets reported in ADV Part II Item 4 – $17 Million in Part 1, Item 5F and GIPS Firm assets.

U.S. Dollar Amount

Discretionary: (a) $16,832,000,000

Non-Discretionary: (b) $0

Total: (c) $16,832,000,000

Firm C: Both managed discretionary and supervised advisory only assets traded by the firm – $780 Million in Part 1, Item 5F and GIPS Firm assets.

U.S. Dollar Amount

Discretionary: (a) $668,334,079

Non-Discretionary: (b) $111,447,910

Total: (c) $779,781,989

Look for future articles by Cascade Compliance on other ways 2020 GIPS is impacting GIPS Firm assets. If you really like a proposed 2020 GIPS provision, be sure to comment before December 31, 2018. Questions/Clarifications? Contact kim.cash@cascadecompliance.com.