Global Investment Performance Standards: Dispelling Compliance Cost, Verification Myths
As a standard setter in the investment industry, CFA Institute understands the importance of listening to our stakeholders views and opinions. And to continue to be relevant, we have to study trends in the market and sentiments about those trends, especially in such a fast-changing, dynamic environment. With that in mind, CFA Institute launched the GIPS 20/20 project to update its Global Investment Performance Standards (GIPS®). The project team has prioritized seeking input from all stakeholders in the industry to help inform the update, starting with the first-ever GIPS 20/20 Consultation Paper. To contribute to the project, the United States Investment Performance Committee (USIPC), a GIPS Sponsor, conducted a survey of asset owners, asset managers, and third-party service providers for input on compliance and third-party verification.
The 321 globally dispersed respondents represented asset managers (60%), asset owners (3%), verifiers (15%), and other categories (22%). Nearly 40% of respondent’s firms have less than $5 billion in assets under management (AUM), and half of those manage less than $1 billion. Of the asset managers, 75% said they claim compliance, and 64% of those have been compliant for more than 10 years.
A strong majority of both asset managers (87%) and asset owners (72%) agree that GIPS compliance benefits a firm. But despite that belief, firms have chosen to not comply. Top reasons for not complying include cost, lack of demand from investors, and applicability of the Standards or lack of guidance in certain areas.
The most prevalent reason that a third of the respondents cited for not claiming compliance is that time, resources, and costs involved are too high. Among asset managers with less than $1 billion AUM, 60% cite costs. Although no requirement of the GIPS standards necessarily requires a sophisticated software system, 93% of respondents, regardless of firm size or region, believe that a substantial investment in technology is required when considering compliance. Additionally, 42% believe that compliance exposes firms to regulatory risk.
But the compliant costs often are less significant than firms anticipate. Firms are often overwhelmed and do not realize that they already have more of the organizational structure and investment processes in place than they think, from data input to preparing performance presentations. The GIPS standards website is an excellent resource. And another great resource is the white paper “Assistance to Firms Considering Compliance with the GIPS Standards,” which includes guidance on processes and activities already being performed by many firms that move them closer to GIPS compliance. Finally, a resource aimed at debunking some myths about the GIPS standards is in the works and will be released in the coming months.
Although complying with the GIPS standards involves more than just creating a compliant presentation, including setting and maintaining effective policies and procedures and implementing strong internal controls, there are benefits in having strong organizational practices that ensure a successful working system and ultimately, protect investors’ interests through fair representation and full disclosure.
Prospective Clients Are Asking for GIPS Compliance
Of the respondents, 69% indicated that prospective clients do either require or inquire about compliance, with a small minority (13%) stating that the demand from prospective clients is not enough to be worth the resources needed to become compliant with the GIPS standards. The key is that if firms want to truly commit to helping rebuild trust in the industry, being able to show how compliance with the GIPS standards gives prospective clients the transparent and comparable information they need to make informed decisions builds that trust.
More Guidance Needed in Some Areas
The GIPS standards just celebrated its 30th anniversary. And even though that longevity highlights their stability, a lot has changed in the investment management industry in three decades. A concern expressed repeatedly was that guidance is lacking in the areas of investing in private equity and real estate, using overlay strategies, including supplemental information in reports, selecting appropriate benchmarks, and handling performance record portability. The goal of the GIPS 20/20 project is for the next edition of the Standards, the 2020 GIPS Standards, to be universally applicable to all types and sizes of firms all over the world. Joe D’Alessandro, who serves on the USIPC and is director of real estate performance measurement at NCREIF, said that “the survey provided confirmation of the areas requiring more attention. For example, making GIPS more relevant for private wealth, hedge fund, private equity, and real estate investment managers is one of the key goals for the 2020 GIPS standards.”
GIPS Compliance Gives Competitive Edge
Another recurring theme in the survey responses was an urgent call to promote the GIPS standards to growing firms in developing markets that want to win sophisticated clients, but they do not realize the competitive edge that a commitment to GIPS compliance can give them. Firms that invest resources in the interest of protecting investors and increasing transparency should not underestimate the impact it will have on prospective clients. A top priority for the GIPS standards team in the coming years is to increase outreach across the globe, emphasizing the return on investment that comes to a firm that choose to be compliant with the GIPS standards.
Myth Busting: Verification Not Required
Firms that decide against pursuing compliance often make that decision without realizing that they are likely doing most of what the GIPS standards require, or they have wrong information about what is actually required. For example, the survey revealed that many firms believe, even compliant firms, that third-party verification is a requirement. Of respondents at compliant firms, 94% said their firm has chosen to implement this optional but recommended step. Of the 25% respondents that do not claim compliance, verification was one of the reason given for non-compliance. This misperception highlights the need to better clarify requirements versus recommendations.
Stay Tuned for Updates
The valuable feedback from this survey is being shared with the GIPS 20/20 project team and will help shape the Standards for the future. The exposure draft of the 2020 edition of the GIPS Standard is anticipated to be available for public comment by September 2018. We look forward to your important feedback and joining us in this exciting opportunity to continue to make advances in the investment performance industry.
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Photo Credit: ©Getty Images/Enis Aksoy