Why are the Global Investment Performance Standards (GIPS) Needed?
Global markets increase competition and require that firms be able to advertise their performance on a consistent playing field with firms around the world. These standards allow investors to have confidence in the fair calculation and presentation of performance information. Although compliance with these standards is voluntary, firms cannot afford the lost opportunities created by not following industry best practices. The processes and procedures that are put into place in order to become GIPS compliant will strengthen the firm's internal control structure, maximize investor confidence, and give the firm a marketing advantage.
Verification requires an independent assessment of whether the firm has complied with all composite construction requirements and whether the firm’s policies and procedures are designed to calculate and present performance in compliance with GIPS.
A performance examination is a specifically focused performance examination of particular compliance presentation preformed by an independent third-party verifier.
Why Have An Independent Third-Party Verification or Performance Examination?
• Verification is considered to be a best practice.
• An independent verifier can assist in maintaining GIPS compliance.
• The GIPS Executive Committee that maintains these standards strongly encourages firms to become verified.
• Only firms with verified performance can advertise that their returns have been verified.
• Investors will place additional confidence in and maintain their assets with firms who have their performance verified.
• GIPS compliance and verification are required by most institutional investors.
• Annual audited financial statements provide only limited performance information.
• A performance examination further increases investor confidence.
Firms Should Act Soon
Investors will be asking for GIPS compliance soon if they aren't already, and a firm's first GIPS compliant report must present a minimum of five years of annual returns or returns since inception if the firm has been established for less than five years. The costs and frustrations associated with going back five years to accumulate the data necessary to prepare GIPS compliant information will be significantly greater than becoming GIPS compliant early and working forward five years. After the initial verification, the firm must add an additional year of performance each year until a minimum of 10 years of GIPS compliant performance is presented.
Documentation and Planning are Key
Management will need to carefully consider and document the following, at a minimum, before calculating performance numbers:
• Define firm (which assets under management will be included)
• Define discretionary vs. non-discretionary accounts (which accounts are managed by the firm vs. client directed)
• Create meaningful composites by grouping portfolios by investment objectives and strategies
• Establish a firm policy for the treatment of new and closed accounts and for accounts that change composites due to changes in investment objectives
• Establish a firm policy for computing gross and net of expense time-weighted returns
• Establish a firm policy for the treatment and definition of significant cash flows
• Establish a firm policy for the treatment of specific firm issues such as: special fee arrangements, foreign exchange rates, fair value issues, etc.
• Capture and maintain consistent and accurate input data that is valued in accordance with fair value accounting standards at least monthly and on the date of all large cash flows if more frequently
• Maintain trade date and accrual accounting
• Consider working with an independent firm to review your procedures and data captured and assist with any necessary changes
The complete 2010 edition of GIPS is available on the GIPS website (www.gipsstandards.org).
Decosimo Will Be Your Partner
Firms will encounter many difficulties along the road to GIPS compliance. The costs associated with obtaining guidance and advice during the creation of policies and procedures used in becoming compliant with GIPS will be significantly reduced if advisors are hired to provide guidance and perform the verification as a package deal. Firms should consider designating a GIPS champion to carefully research the standards and obtain advice in establishing the GIPS Framework.
It is critical for an independent verifier to maintain independence, but Decosimo can point your research in the right direction, suggest improvements to the processes and procedures before they are put into place, and assist with staying current with the most up to date requirements. Firms will also find it beneficial to work with an independent firm to prepare a GIPS compliant presentation. Having our experts on your side will ensure that the necessary data is being collected and keep you on the right track from the start.
Decosimo is a PCAOB-registered firm, and our Financial Services Group provides tax, audit and advisory services to numerous investment companies with diverse strategies in the U.S. and offshore. Our financial services professionals are eager to provide you with the information you need to navigate the new road ahead and to provide an overview of what becoming GIPS compliant will entail.
About Decosimo and Expertise
Since 1971, Decosimo has been a trusted advisor to businesses, individuals and not-for-profit organizations. With nine office locations in Tennessee, Georgia, Alabama, Ohio and the Cayman Islands, Decosimo provides audit, tax and advisory services to clients across the U.S. and throughout the world. And as an independent firm associated with Moore Stephens International Limited, we have access to additional resources and professionals in 314 firms with 638 office locations across 97 countries.
Clients include financial services firms, alternative investment partnerships and governmental entities, in addition to middle-market companies in various industries such as manufacturing, real estate, hospitality, healthcare, entertainment and major league sports franchises.
Decosimo’s Financial Services Group provides a full range of sophisticated advisory services to various asset management companies responsible for venture capital funds, mutual funds, variable annuity separate accounts, common trust funds, unit investment trusts, offshore funds, business trusts, group trusts, broker/dealers, hedge funds and management companies.
Beyond tax and assurance solutions, Decosimo’s advisory services include: independent due diligence and transaction services; accounting assistance with fund launches; counsel related to fund structure, fee agreements and complex tax allocation issues, and advise on matters of board governance.
Many services are provided from our full service Grand Cayman office, Moore Stephens Decosimo Cayman Limited, to help clients leverage the benefits of a jurisdiction without direct taxation.
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