Why is GIPS gaining in popularity? A minimum global standard for firms to calculate and present their investment performance makes sense for everyone: the asset owner, the firm, and the investor. When an asset owner, such as a pension or endowment, can compare confidently the performance of several investment managers and make decisions with accuracy, the investor is who benefits.
The only way that can happen is when the firm is GIPS compliant, and to a greater extent, GIPS verified. In choosing to comply with GIPS, firms are voluntarily adhering to the highest ethical standard in the calculation and presentation of their investment results. In becoming GIPS verified, the firm affirms its commitment to investors, conveyed by the third-party assertion that the GIPS verifier provides.
A gips verification entails reviewing that the firm has designed its processes and procedures to calculate and present performance results in compliance with the GIPS standards, which revolves around a verification of the firm’s GIPS compliance manual. The GIPS verifier then asserts that the firm has complied with the GIPS standards’ composite construction requirements.
From the inception of the GIPS standards in 1999, the focus has always been on the investor. CFA Institute’s commitment to ethical and comparable investment performance standards in fact goes back to 1987, when the predecessors to the Global Investment Performance Standards (GIPS), then known as the Performance Presentation Standards, were first created.
In response to what had become an evident and urgent need for investment firms to present their performance in a manner that communicated fair representation and full disclosure, and with the counsel of industry leaders, the GIPS standards were created as practitioner-driven, non-regulatory, and voluntary. Most importantly, GIPS are a global standard.
Today, 2,000 firms, located in 41 countries around the world, claim compliance with GIPS.
How GIPS Compliance Can Benefit the Investment Industry as a Whole
In addition to the benefits for asset owners and investors, GIPS compliance can help improve the investment industry as a whole. By establishing a minimum standard for performance reporting, GIPS can help promote transparency, accuracy, and comparability of investment performance data. This, in turn, can increase investor confidence and trust in the industry, attracting new capital and driving growth.
Furthermore, GIPS compliance can help foster a culture of ethical and professional behavior among investment firms. By voluntarily adhering to the highest ethical standards in calculating and presenting their investment results, firms can demonstrate their commitment to transparency, accountability, and fairness. This can help distinguish them from competitors that may not adhere to such standards and can ultimately contribute to the overall health and integrity of the investment industry.
Moreover, GIPS compliance can also help firms improve their internal processes and procedures for performance reporting. By designing systems conforming to GIPS standards, firms can streamline their reporting processes, reduce errors and omissions, and provide investors with more accurate and timely performance data. This can ultimately result in cost savings, improved operational efficiency, and a more competitive position in the marketplace.
In conclusion, GIPS compliance can benefit the investment industry as a whole by promoting transparency, accountability, and ethical behavior among investment firms. By establishing a minimum standard for performance reporting, GIPS can help improve the quality and comparability of investment performance data, which can increase investor confidence and trust in the industry. Additionally, GIPS compliance can help firms improve their internal processes and procedures for performance reporting, which can result in cost savings and improved operational efficiency.
Understanding the Differences Between GIPS Compliance and Other Investment Standards
While GIPS is a widely recognized investment standard, there are other standards and regulations that investment firms may need to comply with. Understanding the differences between GIPS and other investment standards can help firms make informed decisions about which standards to adopt and how to prioritize compliance efforts.
One key difference between GIPS and other standards, such as SEC regulations or ISO standards, is that GIPS is a voluntary, industry-driven standard. Unlike regulations, which government agencies enforce, GIPS compliance is not mandatory. However, many firms choose to comply with GIPS to demonstrate their commitment to ethical behavior and to provide investors with accurate and reliable performance data.
Another difference between GIPS and other investment standards is the scope and focus of the standard. While SEC regulations may focus primarily on disclosure requirements and risk management, GIPS is focused specifically on performance reporting. This means that GIPS standards are designed to help firms communicate fair representation and full disclosure of investment performance data rather than regulating other aspects of the investment process.
Additionally, GIPS standards are global in scope, while other standards may be more regionally focused. This means that firms operating in multiple jurisdictions may find GIPS compliance to be a more efficient and effective way to meet global performance reporting standards.
In conclusion, understanding the differences between GIPS compliance and other investment standards is important for investment firms to make informed decisions about which standards to adopt and how to prioritize compliance efforts. While GIPS is a voluntary, industry-driven standard focused on performance reporting, other standards may have different scopes and focus and may be enforced by regulatory bodies. Understanding these differences can help firms navigate the complex landscape of investment standards and ensure that they are meeting the needs of their investors.
Provide Tips for Firms Looking to Achieve GIPS Compliance
Achieving GIPS compliance can be a complex and time-consuming process. Here are some tips to help firms navigate the GIPS compliance process and achieve GIPS compliance:
Understanding the GIPS Standards
Before beginning the compliance process, it’s important for firms to thoroughly understand the GIPS standards and how they apply to their business. This includes understanding the required verification procedures, the procedures related to composite construction and maintenance, and the requirements for GIPS reports.
Developing Policies and Procedures
To achieve GIPS compliance, firms must develop and maintain policies and procedures that conform to GIPS standards. This includes procedures related to composite construction and maintenance, internal controls, and performance examinations. It’s important for firms to document these policies and procedures in a procedures manual to ensure that they are consistently followed across the firm.
Conducting a Firm-Wide Verification
To claim compliance with the GIPS standards, firms must undergo a firm-wide verification by an independent verifier. This verification process involves reviewing the firm’s policies and procedures, performing performance examinations, and conducting verification tests. It’s important for firms to work closely with the verifier to ensure that the verification process is conducted in an unbiased manner.
To ensure that the verification process is conducted in an unbiased manner, firms should maintain independence between the personnel responsible for maintaining the firm’s policies and procedures and those responsible for conducting the verification. This can be achieved by designating separate personnel for these roles or by outsourcing the verification process to a third-party provider.
Pooled Fund Maintenance
For firms that manage pooled funds, it’s important to maintain the required records and documentation to support the performance of these funds. This includes maintaining records of cash flows, holdings, and valuations and ensuring that the pooled fund meets the requirements for GIPS compliance.
Claiming Compliance and Becoming GIPS Verified
Once a firm has developed and maintained its policies and procedures, undergone a firm-wide verification, and addressed any identified deficiencies, it can claim compliance with the GIPS standards. To become GIPS verified, the firm must receive a GIPS verification from an independent verifier, which provides additional confidence to the firm’s client base that its performance data is reliable and accurate.
In conclusion, achieving GIPS compliance can be a complex process, but it can provide many benefits to investment firms, including increased investor confidence and trust. By understanding the GIPS standards, developing policies and procedures, conducting a firm-wide verification, maintaining independence, and properly maintaining pooled funds, firms can achieve GIPS compliance and claim compliance with the GIPS standards on a firm-wide basis. Additionally, by becoming GIPS verified, firms can provide additional confidence to their asset owners that their performance data is reliable and accurate.