Quality Control: How to check for errors in your investment performance
Sean P. Gilligan, CFA, CPA, CIPM
Managing Partner
May 5, 2021
15 min
Recent investment performance calculation mistakes at Pennsylvania Public School Employees’ Retirement System (“PSERS”) have highlighted the importance of quality control reviews and raises questions about where risk exists, how these risks can be mitigated, and what role independent verifications should play in the quality control process.
What happened at PSERS?1
An error in the return calculation for Pennsylvania’s $64 billion state public school employee retirement plan has had serious implications for its beneficiaries and those involved in the calculation mistake.
In 2010, the plan, which was already underfunded, entered into a risk-sharing agreement where employees hired after 2011 would pay more into the plan if the return (average time-weighted return) over a specific time period fell below the actuarial value of asset (AVA) return of 6.36%.
In December 2020, the board announced that the plan had achieved a return of 6.38%, a mere 2 basis points above the minimum threshold. But in March the board changed its tune, announcing that the calculation was incorrect and the 100,000 or so employees hired since 2011 (and their employers) should have actually paid more into the plan.
What’s worse is PSERS also announced that the FBI is investigating the organization, although details of the probe have not yet been released.
According to PSERS, a consultant, that had calculated the return, came forward and admitted to the calculation error. But the board also said that it is looking into potential cover up by its staff. From what we know, at least 3 independent consultants were involved in providing data used for the calculations, calculating the returns, and verifying the returns. So, with all these experts involved, how could this happen and what can your firm do to avoid a similar situation?
Key issues to address in an investment performance quality control process
Firms should develop sound quality control processes to help identify errors before results are published. Often these processes either do not exist or are insufficient to identify issues. Following a robust quality control process that considers the key risks involved and then finds ways to mitigate these risks greatly increases the accuracy of presented investment performance.
Although we do not yet know the cause of the errors found in the PSERS case, we can highlight a few primary reasons errors occur in investment performance reporting. Primarily, errors found in published performance results are caused by:
- Key Issue # 1 – Issues in the underlying data (e.g., incorrect or missing prices, unreconciled data, missing transactions, misclassified expenses, or failing to accrue fixed income)
- Key Issue #2 – Mistakes in calculations (e.g., manual calculations that fail to match the intended methodology)
- Key Issue #3 – Errors in reporting (e.g., publishing numbers that do not match the calculated results)
A robust quality control process should specifically address all three of these areas.
Considerations when designing a robust quality control process
Key Issue #1 – Issues in the underlying data
As they say, garbage in, garbage out. It is important to ask and address questions confirming the validity of data before it is used to calculate performance. Specifically, consider how the data used in the calculations is gathered, prepared, and reconciled before completing the calculations. Is there any formal signoff from the operations team confirming that the data is ready for use? Has a review of the data been conducted by an operations manager prior to this confirmation being made?
While deadlines to get performance published can be tight, taking the time to ensure that the underlying data is final and ready to use before performance is calculated can prevent headaches later on.
The following is a list of issues to look for when testing data validity:
- Outlier performance – Portfolios performing differently than their peers may indicate a data issue or that the portfolio is mislabeled (i.e., tagged to a different strategy than it is invested in).
- Differences between ending and beginning market values – Generally, we expect a portfolio’s market value at the end of one month and the beginning of the next month to be equal (unless using a system where external cashflows are recorded between months and differences like this are expected). Flagging differences can help identify data issues.
- Offsetting decrease/increase in market value – Market values that suddenly increase or decrease and then return to the original value may have an incorrect price or transaction that should be researched.
- Gaps in performance – A portfolio whose performance suddenly stops and then restarts may have missing data.
- 0% returns – The portfolio may have liquidated and may no longer be under the firm’s discretionary management.
- Very low market values – The portfolio may have closed and is only holding a small residual balance, which should be excluded from the firm’s discretionary management.
- Net-of-fee returns higher than gross-of-fee returns – Seeing net returns that are higher than gross returns could indicate a data issue unless there are fee reversals you are aware of (e.g., performance fee accruals where previously accrued fees are adjusted back down).
- Gross-of-fee returns and net of-fee returns are equal – If gross-of-fee and net-of-fee returns are always equal for a fee-paying portfolio, it is likely that the management fees are paid from an outside source (paid by check or out of a different portfolio). The returns labelled as net-of-fee in a case like this should be treated as gross-of-fee returns.
Key Issue #2 – Mistakes in calculations
Mistakes happen, but there are ways to reduce their frequency and impact. First, you’ll want to consider how manual your performance calculations are as well as the experience of the person completing the calculations.
Let’s face it, Excel is probably the most widely used tool in performance measurement, especially for smaller firms. While many firms likely find Excel to be a user-friendly tool for calculating performance statistics, it has its limitations. Studies have shown that up to 90% of spreadsheets contain errors and spreadsheets with lots of formulas are even more likely to contain mistakes. Whether it’s not properly dragging down a formula or referencing the wrong cell, fundamentally, the biggest problem is that users do not check their work or have carefully outlined procedures for confirming accuracy.
Although this may seem obvious, having a second set of eyes on a spreadsheet can save you from the embarrassing headache of having to explain errors in performance calculations. It is even better if this review is a multi-layered process. Having someone review details as well as someone to do a high-level “gut-check” to make sure the calculations and results make sense can reduce this risk. Depending on the size of your firm, this may be easier to accomplish with a third-party consultant, where you serve as a final layer of review.
Having this final “gut-check” can help prevent avoidable errors prior to publication. We find that this final “gut-check” is best performed by someone who knows the strategy intimately rather than a performance or compliance analyst, as these individuals may be too focused on the calculation details to take a step back and consider whether the returns make sense for the strategy and are in line with expectations.
If you use software to calculate performance, you can significantly reduce the risk of manual error, but due diligence should still be performed from time to time to manually prove out the accuracy of the calculations completed in the program. This does not need to be done every time but should be conducted when introducing a new software system and any time changes are made to the program.
Key Issue #3 – Errors in reporting
It may seem silly, but many performance reporting errors come from transposing strategy and benchmark returns in presentations or placing the return of one strategy in the factsheet of another. Therefore, it is important to consider how the final performance figures make it from the system or spreadsheet into the performance presentations. Are they typed? Copy and pasted? Or are the performance reports generated directly out of a system? It’s not enough to complete the calculations correctly, the final reports must also be accurate, so adding a step to review this is crucial.
A similar review process to the one described above can really make a difference, but ultimately, understanding the vulnerabilities of your performance reporting will help you design quality control procedures that address any exposure.
Calculations completed by external performance consultants
Whether performance is calculated internally or by a third-party performance consultant, the same key issues should be considered when designing the quality control process. Due diligence should be done on the performance consulting firm to evaluate the level of experience the firm has with calculating investment performance and what kind of quality control process they follow prior to providing results to your firm. This information will help you determine what reliance you can place on their procedures and what your firm should still check internally.
For example, outsourcing performance calculations to an individual or single-person firm likely necessitates a more in-depth review since this individual would not have the ability to have a second set of eyes on the results prior to providing them to your firm. However, even larger performance consulting firms with robust quality control processes may not have intimate knowledge of your strategies, meaning that, at a minimum, a final “gut-check” should be done by your firm prior to publication.
Reliance on independent performance verification firms to find errors
Many firms that hire performance verification firms rely on their verifier to be their quality control check; however, this may not be a good practice for a variety of reasons. If this is a common practice at your firm, you may want to check the scope of your engagement before relying too heavily on your verifier to find errors.
Verification is common for firms that claim compliance with the Global Investment Performance Standards (GIPS®). But even firms that claim compliance with the GIPS standards and receive a firm-wide verification are required to disclose that, “…Verification does not provide assurance on the accuracy of any specific performance report.”
This is because verifiers are primarily focused on the existence and implementation of policies and procedures. While their review may help identify errors that exist in the sample selected for testing, it specifically does not certify the accuracy of presented results. While the verification process is valuable and often does turn up errors that need to be corrected, regardless of the scope of your engagement, a robust internal quality control process is likely still warranted.
Firms that are not GIPS compliant may engage verification firms for various types of attestation or review engagements like strategy exams or other non-GIPS performance reviews. In these situations, the scope of the engagement may be customized to meet the needs (and budget) of the firm seeking verification. A clear understanding of exactly what is in-scope and specifically what the verifier is opining on when issuing their report is key.
Situations where the engagement entails a detailed attestation tracing input data back to independent sources, confirming that calculations are carried out consistently, and verifying that published results match the calculations, allow for heavy reliance on the verifier as part of your quality control process.
Alternatively, when the scope merely consists of a high-level review confirming the appropriateness of the calculation methodology, a much more robust internal quality control process should be applied.
Knowing the scope of the engagement your firm has established with the verification firm is an important element in determining how much reliance can put on their review and findings, which can then be incorporated into the design of your own internal quality control procedures.
Key take-aways
Mistakes happen in investment performance reporting, but a robust quality control process can greatly mitigate this risk. Understanding the risks that exist, designing processes to test these risk areas, and understanding the role and engagement scope of all consultants involved are essential items in designing a quality control procedure that work for your firm – and hopefully one that will help you avoid situations like what happened with PSERS.
If you are not sure where to begin, we have tools and services available to help. Longs Peak uses proprietary software to calculate and analyze performance. Our software helps flag possible data issues and outlier performers and also produces performance reports directly from our performance system.
In addition, our performance consultants are available to work with your team to help identify potential vulnerabilities in your performance reporting process and can help you develop better quality control procedures, where needed.
Questions?
If you would like to learn more about our quality control process or any of the services we offer (like data and outlier testing) to help improve the accuracy and reliability of investment performance, contact us or email Sean Gilligan directly at sean@longspeakadvisory.com.
1 For more information on PSERS, please see this article from the Philadelphia Inquirer.
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Part 2: Creating GIPS Policies and Procedures
June 22, 2017
15 min
Calculation Methodology, Books & Records, Composite Definitions & Rules, and Error Correction Policies
As discussed in Part 1 of this two part series, GIPS compliant firms are required to document how they comply with the GIPS requirements as well as any recommendations that the firm chooses to follow. This document acts as the firm’s internal representation of their GIPS compliance, and is intended to state the firm’s policies and describe the procedures the firm follows to maintain its compliance.
In Part 1 of this two part series we covered Firm Definition and Definition of Discretion. Now, in Part 2 we will cover calculation methodology, books and records, composite definitions and rules, as well as error correction policies.
https://www.youtube.com/watch?v=UhaTy-4c-EM&feature=emb_logo
Calculation Methodology
While GIPS provides a framework for how to calculate performance, firms may have different methods for handling external cash flows, asset-weighting portfolios, calculating dispersion, etc. The specifics of the methods used must be documented in the firm’s GIPS P&P. This section is typically broken down to separately discuss portfolio-level calculation methodology and composite-level calculation methodology.
The main consideration when establishing your firm’s portfolio-level methodology is the treatment of external cash flows. Since the start of 2010, GIPS requires firms to revalue for all “large” cash flows. It is up to your firm to define the term “large,” but it should be defined based on when your firm feels that estimation methods, such as Modified Dietz, lose their accuracy. Most portfolio accounting systems either value portfolios daily (essentially defining “large” as 0%) or value portfolios for all cash flows 10% or greater. Firms without a portfolio accounting system that are calculating their portfolio-level performance more manually (e.g., in Excel) frequently use 20%, but higher than that is less common.
With regard to composite-level performance, the most important information to document is the method used to asset-weight the portfolio returns to get the composite-level performance results. This is typically achieved through one of the following three methods:
- Asset-weight each individual portfolio’s return for the month based on each portfolio’s beginning market value and then sum the portfolios’ weighted returns to get the composite return for the month.
- Asset-weight each individual portfolio’s return for the month based on each portfolio’s beginning market value plus weighted cash flows and then sum the portfolios’ weighted returns to get the composite return for the month.
- Aggregate the underlying data of all portfolios in the composite and then calculate the performance for each month as if all of the aggregated data is for one large portfolio.
This section should also include information regarding how the other required GIPS statistics are calculated, such as dispersion and 3-year annualized ex post standard deviation. Here, it is important to note whether these statistics are calculated based on gross or net-of-fee returns, whether calculated by your portfolio accounting system or outside the system, (e.g., in Excel) and the specific standard deviation formula used to do the calculation (e.g., a population or sample based formula).
Policies Regarding Books and Records
Firms must be able to support all information included in GIPS compliant presentations as well as support that their client assets are real. This section of your GIPS P&P can outline the types of records that are maintained and in what format/location they are stored. Specifically, firms typically outline the types of documents they have (e.g., custodial statements, records maintained within a portfolio accounting system, printed records from a former portfolio accounting system such as holdings reports, transaction summaries, etc.). In this section, it is also important to mention whether files are hardcopy or electronic, whether they are maintained onsite or offsite, and if there is a limit to the amount of time they are saved.
Composite Definitions and Rules
irms must create policies to ensure that portfolios are placed in the appropriate composite for the correct time period. The timing of portfolio movement in or out of composites must be based on objective criteria that is outlined in this section of the firm’s GIPS P&P. For example, firms typically either set a policy based on the amount of time passed since discretion was granted or based on when the portfolio becomes “fully invested” – which must be clearly defined.
For example, if based on time, the policy may be written as, “portfolios are included in the composite at the start of the first full month under management.” If based on when the portfolio becomes fully invested, the policy may be written to state, “portfolios are included in the composite at the start of the first full month after the portfolio is at least 90% invested in line with the strategy.” The percentage set can be whatever your firm feels is appropriate, but you want to establish a clear threshold that can be followed. Simply stating “fully invested” is subjective and difficult to follow consistently.
Other rules can also be documented in this section such as minimum asset levels and significant cash flow thresholds, to keep portfolios out of composites during periods where the intended strategy cannot be fully implemented. Minimum asset levels set for GIPS composite purposes are different than minimums your firm may set for marketing purposes. While your firm can state any marketing minimum you wish based on the size portfolios you hope to attract, the minimum set for composite inclusion must be based on the minimum amount needed to fully implement that strategy. For example, even if your firm states that your strategy has a $1M minimum, portfolios accepted below this threshold must still be included in the composite if they can be managed the same as the portfolios over $1M. In this example, if you determine that below $500k you can no longer diversify the same way as you do for your larger portfolios, then $500k would be an appropriate minimum to set for composite inclusion purposes.
A significant cash flow policy can be established if your firm is concerned with very large cash flows moving in or out of a portfolio. Often these cash flows affect the portfolio’s performance and could distort the composite’s statistics. Firms wishing to implement a significant cash flow policy establish a threshold for the size of a cash flow (typically based on the percentage of the portfolio’s beginning of month market value) that would trigger the temporary removal of the portfolio from the composite while trading takes place to accommodate the cash flow.
This “significant” cash flow threshold is different than the “large” cash flow threshold discussed in the calculation methodology section. While the “large” cash flow threshold is set to improve the mathematical accuracy of the performance calculation, the “significant” cash flow threshold is based on the size of a cash flow that disrupts the actual management of the portfolio. Significant cash flows often lead to distorted performance figures that were out of the portfolio manager’s control in terms of timing or amount.
Error Correction Policies
Firms must create materiality thresholds that pre-determine the action required if errors occur in a compliant presentation. This section should include thresholds for all statistics as well as criteria for determining when errors in disclosures are material. Defining materiality thresholds can be difficult, but CFA Institute, in conjunction with the United States Investment Performance Committee (USIPC), conducted a GIPS error correction survey seeking information regarding the typical materiality thresholds used by GIPS compliant firms. We recommend reviewing the Executive Summary of this survey’s results to get an idea of the thresholds that have been set by your peers.
Typically, thresholds are set that define the level when an error becomes a material error. Anything above the threshold would require the firm to redistribute an amended GIPS compliant presentation to any prospective client or clients that relied on the erroneous presentation. This amended GIPS compliant presentation would also need to include a disclosure that explains the correction. Anything below the materiality threshold will only trigger a correction for future distributions, but no disclosure or redistribution of previously circulated presentations.
Updates for GIPS 2020
The GIPS standards were updated in 2020. Check out our post How to Update Your GIPS P&P for GIPS 2020 to make sure your P&Ps are consistent with these changes.
Want to Learn More?
If you have any questions about the GIPS Standards, we would love to help. Longs Peak’s professionals have extensive experience helping firms become GIPS compliant as well as helping them maintain compliance with the GIPS Standards on an ongoing basis.
GIPS Compliance Actions for the New Year 2020
January 9, 2022
15 min
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.
This year, conducting a review of your firm’s GIPS compliance is especially important because of the 2020 Edition of the GIPS Standards that was published in mid-2019. For information specific to the 2020 changes, please check out 2020 GIPS Standards: Prepare for the Changes.
Even without the release of a new edition of the standards, each year you should conduct a review. In the 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 compliance 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 GIPS Reports 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.gipsstandards.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.
With the new 2020 Edition of the GIPS Standards, a review of the changes to determine how they affect your firm is especially important this year. These changes must be fully adopted before presenting returns in your GIPS reports for periods ending on 31 December 2020 or later.
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 your firm. 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 composite descriptions, as you must make changes each time a new composite is added or if a composite closes. However, even without adding new strategies or closing older strategies, the list of composite 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 composite descriptions 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 disclosure).
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 and description of the 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 GIPS Reports) 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.
With several mergers, acquisitions, and start-ups in the verification community over the last few years, you may need to do some research to ensure you are familiar with what your options are when selecting a verification 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 a higher 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 has.
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 compromised.
Questions?
For more information on how to maximize the benefits your firm receives from being GIPS compliant or for other investment performance and GIPS compliance information, contact Sean Gilligan at sean@longspeakadvisory.com.
How to Become GIPS Compliant
May 24, 2017
15 min
Many firms are interested in becoming GIPS compliant, but are intimidated by the initial process of bringing their firm into compliance. As long as you know the steps to become GIPS compliant and understand the options you have to complete each step, this process is very manageable. The information provided here is intended to provide you with a high-level overview of the steps you must complete to become GIPS compliant.
https://www.youtube.com/watch?v=E6zBnbW_OMU&feature=emb_logo
Before holding your firm out to the public as a GIPS compliant firm, there are three main steps that must first be completed. Firms must:
- Document GIPS policies and procedures
- Construct composites that consistently follow these policies and procedures
- Create compliant presentations to show the results of each composite
Document GIPS Policies and Procedures
Firms are required to document how they comply with the GIPS requirements as well as any recommendations that the firm chooses to follow in a document known as the firm’s GIPS Policies and Procedures (“GIPS P&P”). This document acts as the firm’s internal representation of their GIPS compliance, and is intended to state the firm’s GIPS policies as well as describe the procedures the firm follows to maintain their compliance. Examples of items typically found in this document include:
- Firm Definition – GIPS is applied to your firm as a whole, not to a single product or strategy you manage. How your firm is defined for GIPS purposes is primarily based on how the firm is held out to the public, which may differ from the legal structure of your firm.
- Definition of Discretion –Discretion is defined differently for GIPS than it typically is for legal or regulatory purposes. You may have a discretionary contract for an account that you deem to be non-discretionary for GIPS purposes because of restrictions the client places on the implementation of the strategy. The “Definition of Discretion” section of your firm’s GIPS P&P should outline objective criteria for determining the discretionary status of accounts.
- Policies Regarding Books and Records – Firms must be able to support all information included in compliant presentations as well as support that their client assets are real. This section of your P&P can outline the types of records that are maintained and in what format/location they are stored.
- Calculation Methodology – While GIPS provides a framework for how to calculate performance, firms may have different methods for handling external cash flows, asset-weighting accounts, calculating dispersion, etc. The specifics of the methods used must be documented in the firm’s GIPS P&P.
- Composite Definitions and Rules – Firms must create policies to ensure that accounts are placed in the appropriate composite for the correct time period. The timing of the movement of accounts in or out of composites must be based on objective criteria that is outlined in this section of the firm’s GIPS P&P. Other optional rules, such as minimum account sizes and significant cash flow thresholds can also be documented here to keep accounts out of composites during periods where the intended strategy cannot be fully implemented.
- Error Correction Policies – Firms must create materiality thresholds that pre-determine the action required if errors occur in a compliant presentation. This section should include thresholds for all statistics as well as criteria for determining when errors in disclosures are material.
Construct Composites
After the GIPS P&P is created, firms can use these policies to construct the composites defined in the policy document. To do this, firms must:
- Identify all of the accounts that meet the definition of a composite. In other words, group all accounts by strategy, but then remove accounts that do not meet the firm’s definition of discretion or that do not meet a composite-specific rule, such as a minimum account size.
- Determine the correct time to include each account as well as remove any account that closed, changed strategies, or otherwise caused you to lose discretion. Portfolios must only be included in composites for periods in which they were considered discretionary for GIPS purposes. This helps ensure that the composite results accurately represent the firm’s management of the composite’s strategy and does not include outside noise created from client-requested restrictions.
- Asset-weight the monthly account-level results for each account included in the composite to calculate the composite-level performance results.
- Calculate all required composite-level statistics (see the list below) that must be included in the composite’s compliant presentation.
Create Compliant Presentations
Compliant presentations act as the firm’s external representation of their GIPS compliance and must be provided to all prospective clients. Each composite has a separate presentation that includes all of the required statistics as well as the required disclosures. Statistics included in compliant presentations include:
- Annual composite performance (gross and/or net)
- Annual benchmark performance
- Number of accounts in the composite as of each year-end
- Total assets in the composite as of each year-end
- Total assets of the GIPS firm as of each year-end
- A measure of internal dispersion for each annual period
- Three year annualized ex-post standard deviation of both the composite and the benchmark based on monthly returns
Other statistics may also be required such as the percentage of non-fee paying accounts or the percentage of bundled fee paying accounts as of each year-end, where applicable.
Want to Learn More?
If you have any questions about how to become GIPS Compliant, we would love to help. Longs Peak’s professionals have extensive experience helping firms become GIPS compliant as well as helping them maintain compliance with the GIPS Standards on an ongoing basis.
How to Comply with the 2020 GIPS Standards
April 23, 2020
15 min
A new decade is upon us and with the new decade comes a series of new requirements in terms of investment performance reporting for firms and asset owners that elect to claim compliance with the GIPS standards.
Many organizations have elected to adopt the 2020 edition of the GIPS standards early and have already put a solid foundation in place for the updated requirements; however, many organizations have not. The adoption deadline for all compliant organizations is rapidly approaching, so if your organization has not begun this conversion, now is the time to get started.
What is Changing and Why
It has been over a decade since the last edition of the GIPS standards was released, and quite frankly, the industry has changed since 2010. As the industry has evolved, CFA Institute has released a number of Q&A’s, guidance statements, and interpretations on how the changes in the industry impact the standards.
Ten years of updates have resulted in a vast repository of information needed to obtain the guidance required to comply. Having so many different resources for guidance (the 2010 GIPS Handbook, separate guidance statements, the Q&A database, and the GIPS Help Desk) has made managing the requirements of GIPS a pretty daunting task; thus, one of the goals of the 2020 standards is to centralize all of the updates that have come out over the past ten years. The 2020 GIPS standards consolidates many of the concepts previously addressed in guidance statements and Q&A’s, allowing the new provisions and explanation of the provisions to serve as the primary source that firms, asset owners, verifiers, and consultants can look to for guidance.
Additionally, the 2010 standards were heavily focused on composites and the traditional definition of prospective clients. Using this as the main framework is not always applicable to organizations that primarily manage pooled funds or asset owners that do not compete for business or report performance to prospective clients. To address this, CFA Institute set out to make this new edition of the standards more applicable to pooled fund managers and asset owners. These updates were designed to make claiming compliance easier and more relevant for these types of managers, while not creating additional burdens on organizations that are already compliant with GIPS. This goal is evident in the new format of the provisions, which separately focuses on requirements for investment firms, asset owners, and verifiers.
In addition to the separation of pooled funds and composites, the guidance is broader on when organizations may present money-weighted returns instead of time-weighted returns. This change now allows the decision to be based on the investment vehicle structure and who controls the timing and amount of external cash flows, rather than limiting money-weighted returns to certain asset classes. This is a welcomed update in the industry as many organizations were frustrated by requirements to calculate and present time-weighted returns when this type of return was not the most meaningful representation of how they managed their investment strategies.
How the 2020 GIPS Standards are Organized
For ease of use and navigation, the 2020 GIPS standards is broken out into three different groups of tailored provisions – firms, asset owners, and verifiers. Each containing specific requirements and recommendations applicable for that type of organization.
As an organization claiming compliance or working to become compliant for the first time, you will need to determine whether the set of requirements for firms or assets owners is applicable to your claim of compliance. The primary distinguishing factor is whether your organization competes for business and manages external money, or reports to an oversight board and manages internal money. The answer to this determines which set of tailored provisions should be followed and sets the framework for how the standards will apply.
Where to Start – GIPS Compliance Updates
Regardless of whether you are excited for the updates to the standards, they are coming and will be required for all firms and asset owners claiming compliance with GIPS. The new requirements take effect once your GIPS Reports (formerly called Compliant Presentations) present performance information that is inclusive of the period 31 December 2020.
There is a lot of information available and dissecting everything that has been released can be overwhelming. For organizations that have never claimed compliance, the good news is that the new standards are more applicable and easier to adopt than they were previously.
For most organizations currently claiming compliance, what’s great is that the new standards do not require a lot of changes, rather they mostly provide optional procedures that you may choose to adopt if you find it beneficial to do so. However, some firms will require more work.
At Longs Peak, we have created the following questionnaire designed to help you determine if converting to the 2020 GIPS standards will require more than a few minor tweaks. This list does not include all changes, but includes the top ten material changes that may require a project plan to implement the required changes by the effective date of the 2020 GIPS standards.
Answering “Yes” to any of the following questions means your organization may require more than a few quick tweaks to implement the 2020 changes:
GIPS 2020 Checklist
- Does your firm have limited distribution pooled funds (i.e., private funds that are not regulated under a framework that would permit the general public to purchase shares in the fund without a one-on-one presentation)?
- Has your firm created single account composites for pooled funds solely for the purpose of meeting the GIPS requirement of having every discretionary, fee-paying portfolio in at least one composite?
- Does your firm have multi-strategy portfolios (e.g., balanced portfolios where the equity and fixed income segments each could be represented as standalone strategies) where you would like to carve-out the individual strategies into their own composites?
- Does your firm have portfolios where actual transaction costs are unavailable (e.g., wrap accounts or other bundled fee arrangements) and you would like to estimate transaction costs to show gross-of-fee returns without labeling the returns as supplemental information?
- Does your firm have portfolios where your firm controls the amount and timing of external cash flows (other than for private equity or real estate) and you would like to present money-weighted returns rather than time-weighted returns?
- Does your firm have real estate or private equity composites?
- Does your firm include theoretical performance (e.g., model performance) as part of a GIPS report?
- Does your firm follow the Advertising Guidelines to claim compliance with the GIPS standards outside of your GIPS Reports?
- Does your firm currently update your GIPS compliant presentations more than 12 months after the year ends?
- Does your firm have advisory-only assets or uncalled committed capital you wish to present in your GIPS Report?
Although the intent is for the adoption of the standards to be more relevant, many organizations find themselves asking “where do I even begin?” The great news is that you don’t have to figure this all out on your own.
At Longs Peak, we have spent countless hours familiarizing ourselves with the new standards and have helped all of our clients begin to adopt the changes. We know what issues come up and how to navigate the changes required.
As a consultant, we do not have independence requirements like your verifier, so we can actually help you implement many of the 2020 changes required for your organization. If you do not already work with a GIPS consultant, now may be a good time to consider hiring one, especially if you lack the resources needed to get this done by the deadline to convert to the 2020 GIPS standards.
Contact us if you do not wish to read through all of the requirements and recommendations to identify what actions are required for your organization.
Finally, if you would like to read more about what changed and why, we have summarized the main changes to the GIPS standards in GIPS 2020 What’s Changing and What you Should Do.
Recommended Post
Most managers assume that losing an allocation comes down to returns. Underperform the benchmark, underperform peers, and the mandate goes elsewhere. That happens, but it's not usually the reason a manager gets cut from a search after the numbers already looked competitive.
More often, it's something in how the performance was presented that made an allocator hesitate. A number that didn't match across two documents. A risk statistic nobody could explain. A question in due diligence that the manager couldn't answer cleanly. None of these are calculation errors. They're trust problems, and trust is what allocators are ultimately seeking when they write a check.
Here are the performance problems we see that cost managers allocations most often, and none of them start with the returns themselves.
The Numbers Don't Match Across Documents
An allocator pulls up your factsheet, your pitchbook, and your GIPS® Composite Report, and the composite's five-year return isn't quite the same in all three. Maybe it's a rounding difference, or the factsheet reflects a different "as of" date. The allocator doesn't know that, and they aren't going to assume the best. Inconsistency reads as carelessness, and carelessness in performance reporting raises an obvious question: what else isn't being checked?
This is why we push firms to treat marketing and GIPS compliance as one coordinated process rather than two departments working from different source files. Every document that leaves the building should trace back to the same underlying data.
This matters even more now that due diligence itself is being automated. Operational due diligence teams and consultants are increasingly running AI tools that cross-check pitchbooks, factsheets, DDQs, and regulatory filings against each other, flagging contradictions that used to slip through manual review. A rounding difference or a stale figure that a person might have missed a few years ago is exactly the kind of inconsistency these tools are built to catch instantly. Clean, consistent marketing materials aren't just good practice anymore — they're what it takes to pass a review that may happen before a person ever looks at your numbers.
Performance That Looks Selected, Not Reported
Showing your best-performing account, your best-performing period, or a composite with an unusually small number of accounts invites the question every allocator is trained to ask: what am I not being shown? Due diligence teams know that everyone can't be top quartile. The SEC Marketing Rule's anti-cherry-picking provisions exist because this pattern is common enough that regulators built rules around it, and sophisticated allocators are watching for it. If your performance can be read as overly flattering rather than representative, assume a diligence team will read it that way.
Wanting to lead with your best numbers is an understandable impulse. But diligence teams are trained specifically to spot it, and selective disclosure, even when every number in it is accurate, tends to read as a bigger warning sign than an honest, complete track record would. The stronger story is discipline: the periods where you held to your stated mandate and didn't deviate even while returns lagged. That's a harder story to tell than "we outperformed," but it's the one that actually holds up, because it shows you didn't drift toward whatever was working elsewhere just to keep pace. Chasing returns outside your stated process isn't skill, it's strategy drift, and allocators are trained to spot that just as readily as cherry-picked out performance.
Our advice: resist the instinct to lead with your best examples, and show the scenarios that build trust instead. We recommend showing the ones that demonstrate you stuck to your stated mandate, policies, and procedures, especially when the outcome wasn't your best quarter. Discipline under pressure is a more durable credential than a strong one-off time period, and it's the kind of evidence that holds up long after that number is forgotten.
Statistics You Show But Can't Explain
A page full of risk statistics doesn't build confidence on its own. It invites a follow-up question, and if the manager can't explain what a downside capture ratio of 85% says about the decisions actually made in the portfolio, the statistic becomes a liability instead of an asset. Allocators aren't just checking whether the numbers are favorable. They're checking whether the manager understands their own portfolio well enough to explain it. Statistics presented without interpretation signal that the second answer is “no.”
Likewise, a page of portfolio characteristics that have nothing to do with how the strategy is actually run are not doing you any favors. If you're not making decisions at the sector level, a sector breakdown doesn't tell an allocator anything about your process. If you don't manage individual position sizing, a top-ten holdings list is not adding value.
Your factsheet should be a roadmap for the conversation you want to have, not a checklist of everything other managers include. Every number on it should be something you can explain: how it got there, what decision it reflects, and what it says about how you manage money. A statistic that's only there because everyone else shows it likely isn't helping you if it doesn’t demonstrate active decision making. It's inviting a question you may not have a good answer to.
It's the same logic as a good resume. One padded with every certification, hobby, and unrelated past role doesn't read as impressive, it reads as overwhelming and maybe irrelevant, and it makes the reader work harder to find what actually matters to the job at hand. A factsheet works the same way. The strongest ones include only what's relevant to the case being made and make it easy to connect every line back to it.
No One Can Explain Why a Decision Was Made
This is the one that costs managers the most, and it's rarely about the numbers at all. An allocator asks why a composite was redefined, why a benchmark changed, or why a particular account was excluded, and the answer is a shrug or "that's how we've always done it." Undocumented decisions create the impression that performance is being managed reactively rather than governed intentionally. Firms that can point to a clear, contemporaneous record of why a judgment call was made close that conversation quickly. Firms that can't do this will leave the allocator wondering what other judgment calls haven't been documented either.
The Common Thread
None of these problems are really about whether the strategy performed well. It comes down to whether the story behind the numbers holds up consistently under scrutiny. Allocators aren't just buying returns. They're also buying confidence that what they're being shown today will still be true, and still explainable, a year from now.
The fix isn't more disclosure for its own sake. It's making sure everything across your performance reporting tells the same, well-documented story before an allocator ever has the chance to ask why it doesn't.
GIPS® is a registered trademark owned by CFA Institute. CFA Institute does not endorse or promote this organization, nor does it warrant the accuracy or quality of the content contained herein.
There is a common assumption among boutique investment managers that the Global Investment Performance Standards (GIPS®) are built for the largest firms in the industry — that compliance is something you pursue once you've reached a certain scale, a certain client type, or a certain level of institutional credibility.
That assumption is understandable. And it is costing firms real opportunities.
The GIPS standards have no AUM threshold to get started. There is no minimum number of clients or composites required before a firm can claim compliance. And increasingly, the institutional marketplace is not waiting for firms to reach some undefined moment of readiness before asking for it. If you are newer to the GIPS standards and want a foundation for what they are and why firms pursue them, start with our post What Are the GIPS Standards?
The Market Has Already Decided
The gatekeepers of institutional capital such as consultants, outsourced CIO platforms, model delivery networks, and institutional allocators, have been quietly raising the bar on performance reporting standards for years. GIPS compliance has shifted from a differentiator to a baseline expectation in many of these channels.
According to eVestment, two out of three manager searches conducted by investors and consultants on their platform exclude firms that are not GIPS compliant. That means boutique managers without a compliance claim are not being passed over, they are simply not being seen. As we explored in From Compliance to Growth, GIPS compliance has effectively become the price of admission for firms seeking to expand into institutional channels.
The question is not whether your firm will eventually need it. For most managers with institutional ambitions, the answer to that question is already yes. The real question is when you choose to pursue it, and whether you make that choice on your own terms or in response to a mandate you cannot afford to lose.
What Compliance Actually Builds Inside Your Firm
The benefits most managers focus on are external. Things like the credibility signal, the access to channels, the due diligence box that gets checked. Those benefits are real. But some of the most meaningful returns from GIPS compliance are internal.
Implementing the GIPS standards requires firms to formalize processes that often exist informally. Composite definitions. Discretion criteria. Benchmark selection rationale. Fee policies. Error correction procedures. For many boutique managers, the implementation process is the first time these decisions have been documented and applied consistently across the firm.
That discipline matters beyond GIPS compliance itself. A firm with clean, documented performance infrastructure is better positioned for regulatory examinations, investor due diligence, and operational due diligence reviews. It demonstrates to sophisticated allocators that the firm is run with the same rigor they apply to their own oversight responsibilities. And for firms that are not primarily focused on institutional distribution, this operational foundation has standalone value, the kind of infrastructure that supports sound governance regardless of who is asking. For more on what a well-governed GIPS compliance program looks like once it is in place, see What Good GIPS Compliance Governance Looks Like in Practice.
The Single Best Argument for Starting Now
Here is the point that does not get made often enough: the smaller your firm and the shorter your track record, the easier it is to become compliant. That ratio flips quickly as you grow.
Retroactively constructing composites across a large number of separate accounts is genuinely difficult work, particularly when no framework existed at the time to assign accounts to composites at inception, or to move accounts between composites as investment objectives changed, client restrictions were added or removed, or mandates evolved. Working through that history portfolio by portfolio, period by period, requires both detailed documentation and sound judgment. It is one of the most time-consuming phases of any GIPS compliance implementation, and the complexity compounds with every account and every year of history added.
A firm with 30 separate accounts and a two-year track record faces a very different implementation project than the same firm a few years later with 500 accounts and a five-year track record. The strategy, the clients, and the investment process may be nearly identical, but the administrative burden of reconstructing historical composite membership correctly is not.
The firms that find implementation most manageable are the ones that started before the project grew into something unwieldy. The firms that find it most painful are the ones that waited until an institutional prospect made it urgent.
What if you are not ready to commit to full compliance yet?
That is a legitimate position. But there is a practical middle path worth considering: even if a firm does not want to claim compliance with the GIPS standards today, building out the composite structure and creating policies and procedures for managing those composites now is a worthwhile investment. That framework does not require a formal compliance claim to be useful. Additionally, it can be carried directly into a full GIPS compliance program when the time is right, dramatically reducing the effort required at that stage.
The Real Costs
Becoming GIPS compliant requires real work, and it is worth being direct about what that entails. At a high level, implementation comes down to four phases: defining the firm, building a GIPS standards policies and procedures manual, constructing composites and calculating performance, and creating GIPS Reports with ongoing monitoring controls. We walk through each phase in detail in A Practical Framework for Implementing the GIPS Standards.
In terms of ongoing commitment, firms should expect monthly composite management, annual GIPS Report updates, periodic policies and procedures reviews, and distribution tracking. For a lean team, owning all of this internally is often not realistic. The good news is that outsourcing to a GIPS compliance consultant is a well-established path for boutique managers and one that many firms in our client base have taken successfully. The total cost of compliance for a focused, well-organized firm is frequently lower than managers expect, particularly when implementation is approached while the firm's history and account universe are still manageable.
Is This the Right Time for Your Firm?
Not every firm is at the same point in this decision. Managers with the strongest case for pursuing GIPS compliance now include:
- Firms actively pursuing institutional mandates or seeking coverage from investment consultants
- Managers on model delivery platforms or building toward that distribution channel
- Firms planning meaningful growth over the next two to three years
- Any manager whose clients or prospects have already raised the question
- Firms that simply want to build a best-in-class performance reporting foundation, regardless of where their distribution strategy stands today
The case is lower urgency for firms focused exclusively on high-net-worth or retail clients with no near-term institutional ambitions; however, there is still value in building a sound performance reporting structure, and the sooner it is established, the easier the work will be.
On Verification: You Can Wait
Verification is independent, voluntary, and valuable. It is also not required to claim compliance with the GIPS standards, and for cost-conscious boutiques, it is a reasonable place to exercise flexibility.
A firm can become GIPS compliant today and gain all the operational benefits and the ability to make the compliance claim and defer pursuing verification until there is specific demand for it. When an institutional prospect or consultant asks whether the firm is verified, that is the right moment to add it. The compliance foundation built now makes that future engagement faster and less disruptive. For a detailed walkthrough of what the verification process involves, see our series How to Survive a GIPS Verification.
Verification is worth having. It just does not need to happen on day one.
The Longer You Wait, The Heavier the Lift
GIPS compliance is not an initiative that gets easier with time. Every year a firm grows its account base, extends its track record, and adds complexity to its operations without a compliance framework in place is another year of history that will eventually need to be organized, documented, and reconstructed.
The managers who find implementation most straight forward are not the ones with the most resources. They are the ones who started early enough that the project was still proportionate to the size of the task.
If your firm is headed toward institutional distribution (most boutique managers we work with are), the best time to build this infrastructure is before you need it. The second best time is now.
Longs Peak Advisory Services specializes in GIPS compliance and investment performance consulting for investment managers and asset owners. We have helped over 250 firms implement and maintain compliance with the GIPS standards. If you are evaluating whether now is the right time for your firm, we would be glad to talk through it. Reach out athello@longspeakadvisory.com.
GIPS® is a registered trademark owned by CFA Institute. CFA Institute does not endorse or promote this organization, nor does it warrant the accuracy or quality of the content contained herein.
Every Spring, the performance measurement community gathers for PMAR: The Performance Measurement, Attribution & Risk Conference, hosted by TSG. This year marked the twenty-fourth annual, and I left thinking about it differently than I have in years past.
Most years, the themes evolve gradually. This year, I felt like the ground was moving.
The theme nobody put on the agenda but ran underneath nearly every session was the pace of change. Specifically, what artificial intelligence is about to do to our work. And while I came away energized, I also came away with a healthy dose of " we (as in everyone) are not ready for how fast this is coming."
Here's what stayed with me.
AI Was the Undercurrent of the Whole Event
The session titled "AI, Anxiety, and Opportunity: What Performance Professionals Need to Know" was, predictably, one of the most sought-after sessions of the conference. The panel, which included practitioners from across the industry, did a nice job naming both sides of the coin: the anxiety of not knowing what your job looks like in five years, and the opportunity sitting right in front of us if we lean in.
Here's my honest read of the room, though. The mood was optimistic. Maybe a little too optimistic. There was a comfortable assumption that AI will mostly handle the tedious parts and leave the interesting work to us. Or that AI won’t take your job, someone that knows AI will. I'm not sure it'll be that tidy.
From what we're already seeing in our own work and across the firms we serve, the capabilities are advancing faster than most people can comprehend. The days where “our industry is just slower to adapt” are gone. Just last week, anthropic released Fable 5 and before it was shut down (temporarily?), we played around with it a little and its capabilities are dumbfounding. I don't think it will be long before these conferences look drastically different. Different sessions, different vendors, maybe a different sense of what the job even is. That's not a doom prediction. It's just a reason to pay closer attention than feels comfortable.
Separating Skill From Luck Just Got Harder and More Important
One of my favorite sessions was Michael Ervolini's "You Can't Find Skill in Returns: Distinguishing Performance From the Decisions That Generate Them." It's a deceptively simple premise: returns tell you what happened, not whether the manager was actually good. A great number can come from a great decision, or from luck. A bad number can hide genuine skill.
What I appreciate about PMAR is that the community keeps bringing fresh perspectives to this old, hard problem: how do we actually evaluate skill versus luck? It's a question that never fully resolves, and every year someone pushes the thinking forward.
It struck me that this question gets more important in an AI world, not less. As machines take over more of the calculation and even some of the decision-making, our value shifts toward judgment – knowing which decisions deserved credit, which results were noise, and what a number actually means in context. That's the kind of discernment a model can assist with but can't own. For more from Mr. Ervolini, here's a link to his latest book Skill vs. Luck.
The GIPS Challenges That Keep Coming Back
I'm biased here, but the "Common GIPS Challenges and How to Avoid Them" session was a highlight for us, in part because our own Matthew Deatherage, CFA, CIPM, was on the panel alongside peers from TSG, MassPRIM, and Strategic Investment Group.
What I always find striking about this topic is how consistent the challenges are. Firms pursuing compliance with the Global Investment Performance Standards (GIPS®)* tend to stumble on the same handful of issues year after year, and almost all of them are avoidable with the right foundation in place. That's a big part of why we do what we do at Longs Peak: helping firms get ahead of those pitfalls instead of discovering them during verification or, worse, during a regulatory exam.
Matt is a familiar face on these panels, and it's great to have our perspective in the mix. But the takeaway that stuck with me tied right back to the AI thread running through the whole conference.
Across several different panels, presenters talked about feeding the GIPS standards into their own AI models to churn out GIPS reports. And here's the thing, anyone can do that. You can drop the standards into a model in minutes. What a model can't do is provide critical judgment about how a principles-based framework should be applied to your specific facts and circumstances and whether those GIPS reports and statistics were calculated correctly. The GIPS standards aren't a checklist; they're a set of principles that require interpretation, and interpretation is exactly where experience earns its keep.
I'm not saying don't use AI to help build a framework. Use it. But like any model, if you don't really know what you're asking it to do, the output won't save you. Simply asking a model to "make my firm GIPS compliant" isn't going to make it so. At least not yet!
And there's one problem every performance professional already knows AI hasn't solved: data. As they say, garbage in, garbage out. Meaningful performance lives and dies on clean, well-organized data, and no software tool or AI model fixes messy inputs alone. At Longs Peak, we have spent the last 10 years working with clients to improve data quality through data integrity testing. For us, these AI models have only expanded what’s possible. We know one thing for sure: setting these tools up with the proper context (i.e., knowing what to look for) and then evaluating that context on an ongoing basis may turn out to be the most crucial piece of it all.
CFA Institute Is Listening on the CIPM
A session I didn't expect to find as interesting as I did was "CIPM Through the Practitioner Lens," facilitated by Rob Langrick of CFA Institute. Rather than simply presenting at the room, CFA Institute came to listen and gather candid feedback on the CIPM designation: where it's delivering value, where it's falling short, and how it should evolve to stay relevant to the work we actually do day to day.
The audience didn't hold back, and there were some genuinely thoughtful suggestions including how the code of ethics will evolve in this new AI era, some recommendations on reformatting the exam to break it into smaller chunks (going into greater detail on each) as well as adding a CIPM group within the CFA societies to encourage further connection. It was refreshing to see CFA Institute putting real energy behind a credential that so many of us have invested in and want to see grow in value. Given the pace of change in our field, willingness to adapt feels necessary. For anyone interested in contributing ideas to the CIPM, you can use this link to provide feedback.
A Quick Word on the Trivia
I'd be remiss not to mention that Performance Trivia got a much-needed upgrade this year. In past years, only a handful of contestants got to play while the rest of us watched (though in fairness, not all of us were clamoring for the spotlight). The new format this time allowed everyone to participate (without taking center stage), and it was a lot more fun for it. A small change, but it captured something I value about this community: it's competitive, but it's also genuinely collegial and prides itself on memorizing quirky names and vintage formulas.
Before PMAR Even Started: Women in Performance Measurement
For me, the week actually started the day before the conference, at the Women in Performance Measurement (WiPM) gathering. An event created just for the women in our industry. It's one of my favorite parts of this trip every year, and not only because the conversation is good. There's something energizing about being in a room full of women who do this work, comparing notes and reconnecting.
Fittingly, AI came up here too, though in a much more hands-on way than it would on the main stage. Practitioners shared real use cases, both personal and professional: the small ways AI is already saving them time day to day, and the bigger experiments they're running at their firms. It was practical, curious, and refreshingly free of hype.
We were also lucky to have a guest speaker, Lidia Arshavsky, who spoke on executive presence. She broke down how executive presence actually gets evaluated inside organizations (the signals people pick up on, often without realizing it) and offered practical recommendations for strengthening your own. It was the kind of talk that's useful no matter where you are in your career.
It was a great way to kick off PMAR, and an even better way to reconnect with women I only get to see a few times a year. Sometimes the most valuable part of a conference happens in these opportunities to network and reconnect within our niche performance community. A big thank you to TSG who donated the space for this event to take place and have done so for many years.
What AI Can't Take From Us
The conference's forward-looking sessions, including "Innovative Ways to Present Performance: Dashboards & Analytics," got me thinking. The tools are evolving so quickly and so much of the analysis, presentation, and reporting can now be automated. I am left wondering how long the traditional use of software in our space will last in its current form.
When the capabilities advancing fastest don’t always come from the established vendors, who benefits? My hope is that everyone does. That these tools level a playing field that used to tilt heavily toward the largest institutions, give smaller firms the ability to deliver high-caliber analytics previously out of reach, and push the whole field toward better solutions. That makes for a more competitive space and ultimately a clearer picture for investors to evaluate their options.
That's the optimistic case, and I believe it. But it only holds if we stay clear-eyed about where our own value comes from and that's the note I want to leave you on. The pace of change is a reason to focus, not to panic. The things that make us valuable are the things AI can't take: consciousness, judgment, and the human-in-the-loop accountability that clients ultimately trust. Machines will calculate faster and present prettier. They won't sit across the table from a client and take responsibility for what a number actually means.
So, by all means, get curious about the tools (Claude seemed to be most people’s favorite – mine as well). Experiment. Don't be the individual or firm that gets left behind. But anchor yourself in the part of this work that's irreplaceably human, because that's the part that was always the point.
See you at PMAR 2027. I suspect it'll look a little different.
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GIPS® is a registered trademark owned by CFA Institute. CFA Institute does not endorse or promote this organization, nor does it warrant the accuracy or quality of the content contained herein.
