Rebuilding Trust: CFA Institute Releases “Principles for Investment Reporting”
Do you find that the information you want and need to know about your investment portfolio is often not reported, and when it is, it is incomplete? To address deficiencies that arise in investment reporting, CFA Institute recently published the first edition of the Principles for Investment Reporting to ensure that investment reporting does not solely reflect the provider’s perspective but also meets the needs and expectations of clients. It is part of the Future of Finance initiative, aimed at shaping a trustworthy, forward-thinking financial industry that better serves society.
The Principles for Investment Reporting — designed to serve as a concise but comprehensive document that, when followed, will facilitate effective investment reporting — addresses five key areas in which reporting is considered deficient:
- Clarity and transparency, reflecting the client’s perspective
- Inclusion of comprehensive fee information
- Providing a consistent approach when presenting complex or technical information
- Sharing of knowledge regarding the preparer’s capabilities and the user’s requirements
- Anticipating the regulatory trends regarding reporting and determining how to self-regulate
In response CFA Institute, in conjunction with its Investment Reporting Working Group, set out to establish a concise and comprehensive set of principles for investment reporting for the purpose of providing customers and clients of financial institutions with a definitive guide to complete, consistent, and transparent reporting. This first edition outlines the key principles, and the second edition builds on these with the introduction of a series of recommendations.
What are the Principles?
- Communication occurs between the preparer and the user as to the purpose of and need for investment reporting
- Control processes, policies, and procedures are documented and followed
- Client preferences are reflected in the investment report
- Clear and transparent presentation of investment risks and results
- Comprehensive fee disclosure
From the start, we were clear that the Principles could not be overly prescriptive because effective investment reporting must reflect the client’s requirements. In prior industry discussions, the loudest objection to any form of reporting document has been that you can’t have a guideline or standard that also allows unique client requirements — an argument used to move such considerations to the back burner.
If the report is to reflect the client’s requirements, the provider has to know what those requirements are. The reality is that no one can do everything for everybody; so while the report provider is learning what the client needs to see, the client is gaining an understanding of what the provider is able to produce. From this exchange, the provider may get some good ideas on where to expand its offering as it allocates its development budget.
Revisiting these capabilities and needs regularly keeps the investment report relevant.
The clear and transparent presentation of the investment results must be accompanied by disclosure of any significant risks inherent in the investments being reported, the strategy being employed, and the overall level of risk in the assets being presented. Effective investment reporting acknowledges the risk that exists in most investments as well as the results that have been generated, and clear and transparent communication of both of these aspects in a report is fundamental for effective investment reporting.
The final principle addresses fees that must be comprehensively disclosed. Rather than focusing on the amounts of the fees, the report provider should disclose which fees are being applied and for what services. This would apply to individual assets that make up the overall portfolio being reported or to the overall portfolio itself. After receiving that list and description of the fees, the recipient can ask for details or amounts.
Ultimately the Principles for Investment Reporting require a transparent exchange of information between the client and the preparer to enable effective investment reporting. The 2013 GIPS Standards Annual Conference in Boston will include a panel discussion on the Principles for Investment Reporting featuring Stefan J. Illmer of Illmer Investment Performance Consulting AG, Lisa A. Massena, CFA, of State Street Corporation, and Hans G. Pieper of Deutsche Performancemessungs-Gesellschaft für Wertpapierportfolios mbH.
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