The primary objectives of the Global Investment Performance Standards (GIPS) are full disclosure and fair representation in marketing presentations. The benefits of GIPS compliance go beyond the compliant presentation, though. Claiming compliance with the GIPS standards shows a firm is committed to ethical best practices and that the firm employs strong internal control processes.
Yes — there is a marketing advantage. Marketing advantage is the number one perceived benefit driving the decision in every survey done on why firms claim compliance with the GIPS standards. What’s driving that advantage? Prospective investors value the claim of GIPS-compliance, especially in the institutional space. They attribute more credibility to GIPS-compliant presentations and to firms that voluntarily comply with best practices.
Firms that claim GIPS-compliance also benefit from improved efficiencies internally. Required best practice performance policies:
- Create a great resource for new hire training and consistent decision making over time and across the firm.
- Encourage inter-departmental dialogues that better inform portfolio managers, sales and marketing, and performance and operations.
- Establish improved internal controls around data inputs, calculation methodologies, valuation frequency, performance presentations and distribution.
- Provide a framework that supports the compliance program, with controls to prevent inadvertent performance errors from going unnoticed and controls for how to redistribute corrected presentations if errors do happen.
Do the benefits of GIPS compliance outweigh the costs? The costs will vary significantly depending on the complexity of the firm and the technology already employed. For firms that are calculating performance, policies are presumably already in place–it’s just a question of documenting and/or upgrading to best practice policies. The costs of not complying are even more difficult to quantify — losing that prospective investor, on-boarding a replacement for a key employee with no written procedures, getting that lengthy SEC deficiency letter, or worse.
Is there a downside to claiming compliance? A few firms–and SEC attorneys–are concerned claiming compliance with the GIPS standards will give the SEC more things to find wrong during a routine examination. These firms often choose to follow the GIPS requirements, gaining the internal benefits, but they don’t claim compliance because they don’t want to be held to the higher standard by the SEC. The downside to this position: If every firm did that, there would be no GIPS standards. The upside: If investors ever demanded compliance, these firms are ready to flip the switch.
The marketplace benefits when market participants are committed to full disclosure and fair representation in presenting their investment performance, and managers benefit from the added credibility such standards bring the profession.
And, to the CCOs reading, even if your firm doesn’t claim compliance, you might use the GIPS standards as a resource for designing your compliance program’s performance testing.
The benefits abound.