“Making Your RIA GIPS Compliant,” a continuing professional education webinar for advisors taught by Amy Jones, CIPM, and Arin Stancil, CFA, CIPM, of Guardian Performance Solutions, explains why UHNWIs are likely to move toward requiring GIPS compliance of wealth managers, provides insight into some of the operational challenges you are likely to face to make your RIA GIPS compliant.
Wealth Managers And GIPS
CFA Institute developed the Global Investment Performance Standards to give investors a uniform way to calculate investment performance, allowing comparisons of one money manager versus another. While applying the standards leaves some room for interpretation by an RIA, it is a credible system for promoting transparency and inspires investors trust. Failing to comply with GIPS when you claim to be in compliance could subject an RIA to civil charges of fraud and, depending on the intent of the people involved and the scope of the problem, could expose an advisor to criminal charges. Just this past week, a Florida advisor was barred from the industry and fined $660,000 after the SEC alleged he had fraudulently claimed GIPS compliance.
Marketing Benefits From GIPS Compliance
Complying with GIPS makes it easier to use performance results in your marketing and advertising materials. I'm not suggesting an RIA would become compliant and then launch a marketing campaign screaming that you gained X% annually since inception. But when you meet with a potential client, you can show your track record and explain it, and you can tell the prospect to ask other RIAs under consideration if they are GIPS compliant. Since it is likely that just a few thousand firms in the U.S. are GIPS compliant -- and only a small number of them serve UHNWIs and the mass affluent because they are all institutional investors -- you'll gain an important marketing advantage over RIAs not complying with GIPS.
CFA Institute, in what I believe could be a step toward becoming the pre-eminent professional-licensing body in the financial advice industry, recently proposed requiring public disclosure of GIPS compliance. If the proposal is adopted by GIPS Executive Committee, a listing of all investment managers worldwide claiming GIPS compliance will be published annually at gipsstandards.org beginning January 1, 2015, along with a link to each GIPS-compliant firm's website.
Requiring that advisors claiming GIPS compliance in advertising be listed on the public website helps remove any ambiguity about whether an RIA is indeed compliant. If a firm is claiming compliance is found in a regulatory inspection not to comply with GIPS, it's subject to civil and possibly criminal charges. The public listing makes GIPS compliance verifiable by anyone, promoting public trust in GIPS. In addition, I'd bet it won't be long till Google updates its search algorithm to factor into search rankings the higher credibility of firm's linked to on the GIPS list.
RIA Operational Issues And GIPS
Jones and Stancil said that becoming compliant could generally cost an RIA $10,000 or $20,000 and will involve every aspect of your firm. Your compliance officer, marketing personnel, and staff downloading data will all need to be involved in GIPS compliance process. Jones mentioned names of two composite management software applications and said those are good investments since PortfolioCenter, Advent Axys, and other popular performance management applications do not natively allow you to create and manage composites.
The heart of the GIPS system is in formulating “composites,” which are collections of portfolios that include the same investment strategies or objectives. For example, you may decide to collect together all your firms "growth" or "income" accounts as separate composites. The portfolios must be discretionary and fairly represent performance of clients with in those types of accounts.
Advisor Ratings And Reviews
The webinar received an average rating of 4.1 from attendees. Since this session is ahead of the curve, it is not surprising that attendance at the live session was light -- about a 25% of the attendance we normally attract every week. To me, that just means only the smartest advisors are paying attention and it strengthens my contention that advisors will gain a competitive advantage by becoming GIPS compliant. Here are the comments from attendees:
- Good information. It would be nice if they would be able to quote an hourly rate, average cost, etc. For me, it gave me a starting point of what to look for.
- Not the most applicable webinar but the information was useful.
- Very informative.
- Very helpful and proactively answered several of the questions I was wondering about.
- Good, and a scary subject!
- The fact that the presenters ‘traded off’ during the presentation was very effective, given the topic and subject matter, which was very interesting, but a bit esoteric at times. They obviously know their stuff and as Andy said, are ‘pioneers’ in the field of GIPS. Thanks.
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