Your firm works hard to comply with the Global Investment Performance Standards (GIPS®) and likely expects the benefits of GIPS to far outweigh any burden associated with maintaining compliance.
Most of the policies and procedures your firm set when first becoming
compliant will never need to change; however, as both the standards and
your firm evolves, it is beneficial to conduct a high-level review of
your GIPS compliance each year. This high-level review will help ensure
that you continually refine your processes and policies to maximize the
benefits of claiming compliance with GIPS year after year.
Before getting into the specific aspects to review, you should first
make sure you have the right people involved. One person or department
may be responsible for managing the day-to-day tasks that maintain your
GIPS compliance; however, high-level oversight from a larger group
should take place to help ensure that any decisions made or policies set
will integrate well with your firm’s other strategic initiatives.
This larger group, often called a GIPS Committee, typically consists
of representatives from compliance, marketing, portfolio management,
operations/performance, and senior management.
Not everyone on the committee needs to be an expert in the GIPS
standards. In fact, many will not be. What they will need is to be
available to share their opinions and represent their department’s
interests when establishing or changing key policies for your firm.
Your GIPS expert/manager can set the agenda for your meeting and can
provide any background on the requirements that will be part of the
discussion. If you do not have a GIPS expert internally, or need
independent advice about your policies and procedures, a GIPS consultant
can be hired to help.
High-Level GIPS Topics to Consider Annually
Once you select the right group to represent each major area of your
firm, the following high-level questions can help determine if any
action is necessary to improve your GIPS compliance this year:
- Have there been any changes to the GIPS standards?
- Have there been any material changes to your firm or strategies?
- Do your composites meaningfully represent your strategies or should their structure and descriptions be reconsidered?
- Are the materiality thresholds stated in your error correction
policy appropriate for the type of strategies you manage and are they
consistent with the thresholds set by similar firms?
- Are you satisfied with the service received from your GIPS verifier for the fee that is paid?
- Is there any due diligence you need to conduct on your verification firm?
Changes to the GIPS Standards
It is important to consider whether there have been any changes to
the GIPS standards since last year that would require your firm to take
action. For example, if a new requirement is adopted, you should
consider if any changes to your firm’s policies and procedures or
compliant presentations are needed.
Keep in mind that GIPS compliant firms must comply with all
requirements of the GIPS standards including any updates that may be
published in the form of Guidance Statements, Questions & Answers
(Q&As), or other written interpretations.
If your firm is verified or works with a GIPS consultant, these GIPS
experts are likely keeping you informed of any changes to the standards.
The best way to check for changes yourself is to visit the “Standards & Guidance” section of www.gipstandards.org. Specifically, you should check the “GIPS Q&A Database”
where you can enter the effective date range of the previous year to
see every Q&A published during this period. You should also check
the “Guidance Statements” section. The guidance statements are organized by year published, so it is easy to see when new statements are added.
Changes to Your Firm or Strategies
Similar to changes in the standards, it is important to also consider
whether any changes to your firm or its strategies would require you to
take action. Examples include, material changes in the way a strategy
is managed, a new strategy that was launched, an existing strategy that
closed, mergers or acquisitions, or anything else that would be
considered a material event for your firm.
Even if no changes were made this year, you should still read your
entire policies and procedures document at least annually to make sure
it adequately and accurately describes the actual practices followed by
Regulators, such as the Securities and Exchange Commission (SEC),
commonly review firms’ policies and procedures to ensure 1) that the
document includes actual procedures and is not simply a list of policies
and 2) that the stated procedures truly represent the procedures
followed by the firm. Many firms have created their policies and
procedures document based on template language, so tweaks may be
necessary to customize the document for your firm.
Meaningful Composite Structure
The section of your GIPS policies and procedures requiring the most
frequent adjustment is your firm’s list of composites, as you must make
changes each time a new composite is added or a composite closes.
However, even without adding new strategies or closing older strategies,
the list of composites and their descriptions should be reviewed at
least annually to ensure they are defined in a manner that best
represents the strategies as you manage them today.
Since your firm’s prospects will compare your composite results to
those of similar firms, it is important that your composites provide a
meaningful representation of your strategies and are easily comparable
to similar composites managed by your competitors. If a review of your
current list of composites leads you to realize that your strategies are
defined too broadly, too narrowly, or in a way that no longer
accurately describes the strategy, changes can be made (with
Keep in mind that changes should not be made frequently and cannot be
made for the purpose of making your performance appear better. Changing
your composite structure for the purpose of improving your performance
results, as opposed to improving the composite’s representation of your
strategy, would be considered “cherry picking.”
Two examples of cases that may require a change in your composites include:
- A strategy has evolved and certain aspects of the way the strategy
was managed and defined in the past are different from today. This can
be addressed by redefining the composite. Redefining the composite
requires you to disclose the date, reason, and nature of change. This
disclosure will help prospects understand how the strategy was managed
for each time period presented and when the shift in strategy took
place. Changes like this should be made to your composite descriptions
at the time of the change, but an annual review can help you address any
items that may have been overlooked when the change occurred.
- A composite is defined broadly to include all large capitalization
accounts. Within this large capitalization composite, there are accounts
with a growth focus and others with a value focus. If your closest
competitors are separately presenting large capitalization growth and
large capitalization value composites, your broadly defined large
capitalization composite may be difficult for prospects to meaningfully
compare to your competitors. To address this, you can create new, more
narrowly defined composites to separate the accounts with the growth and
value mandates. In this case, the full history will be separated and
the composite creation date disclosed for these new composites will be
the date you make the change. Note that this will demonstrate to
prospective clients that you had the benefit of hindsight when
determining the definition.
Materiality Thresholds Stated in Your Error Correction Policy
Another section of your firm’s GIPS policies and procedures that
should be reviewed in detail is your error correction policy. Your error
correction policy includes thresholds that pre-determine which errors
(of those that may occur in your compliant presentations) are considered
material versus those deemed immaterial. These thresholds cannot be
changed upon finding an error; however, they can be updated
prospectively if you feel a change would improve your policy.
Many firms had a difficult time setting these thresholds when this requirement first went into effect back at the start of 2011. Now that much more information is available to help you determine these thresholds, such as the GIPS Error Correction Survey, you may want to revisit your policy to ensure it is adequate.
Setting and approving materiality thresholds that determine material
versus immaterial errors is a task best suited for your firm’s GIPS
committee rather than your GIPS department or manager. The reason for
this is that opinions of what constitutes a material error will vary
from one department to another. Your committee can help find a balance
between those with a more conservative approach and those with a more
aggressive approach to ensure the thresholds selected are appropriate.
GIPS Verifier Selection and Due Diligence
If your firm is verified, it is important to periodically evaluate
whether you are satisfied with the quality of the service received for
the fees paid. You may also want to consider whether you need to conduct
any periodic due diligence on your verification firm with respect to
data security or other concerns important to your firm.
All verifiers have the same general objective: to test and opine on
1) whether your firm has complied with all of the composite construction
requirements of the GIPS standards and 2) whether your firm’s GIPS
processes and procedures are designed to calculate and present
performance in compliance with GIPS. Where they differ is in the fees
charged and process followed to complete the verification.
With regard to fees, much of the difference between verifiers is
based on their level of brand recognition rather than differences in the
quality of their service. For example, smaller firms specialized in
GIPS verification may have more experience with the intricacies of GIPS
compliance than a global accounting firm; yet, a global accounting firm
will likely charge the highest fee. When selecting a higher fee firm, it
is important to consider whether the higher fee is offset by the
benefit your firm receives when listing their brand name as your
verifier in RFPs you complete.
With regard to process, the primary difference between verification
firms is whether the verification testing is done onsite or remotely.
There are pros and cons to both methods and it is important for your
firm to consider which works best for the team that is fielding the
verification document requests.
The onsite approach may result in finishing the verification in a
shorter period, but may be disruptive to your other responsibilities
while the verification team is in your office. The remote approach may
be less disruptive to your other responsibilities, but likely will take
longer to complete and may be less efficient as documents are exchanged
back and forth over an extended period of time. Another difference is
how the engagement team is structured, whether you can expect to work
with the same team each year, and how much experience your main contact
Regardless of whether the verification is conducted onsite or
remotely, be sure to ask any verifier how your proprietary information
and confidential client data is protected. If the work is done remotely,
how are sensitive documents transferred between your firm and the
verifier (e.g., is it through email or a secure portal) and once
received by the verifier, do they have strong controls in place to
ensure your data is not breached.
If the work is done onsite, it is important to ask what documents (or
copies of documents), if any, the verifier will be taking with them
when they leave, and whether these documents are saved in a secure
manner. Documents saved locally on a laptop are at higher risk of being
For more information on how to maximize the benefits your firm
receives from being GIPS compliant or for other investment performance
and GIPS information, contact Sean Gilligan at
Sean P. Gilligan, CFA, CPA, CIPM is the Managing Partner of Longs Peak Advisory Services, LLC. He has 18 years of experience in the investment industry and he specializes in GIPS compliance and investment performance consulting. Visit our website or contact us for more information on our firm and services.