Consultant database reporting is an important business consideration for many investment management firms. The databases serve as a gateway for investment managers to reach institutional and retail assets alike. A recent trend in the industry is that of increased due diligence. The top databases are increasingly requiring firms to meet one of the following requirements:
- Comply with the Global Investment Performance Standards (GIPS®) and have an independent third-party firm-wide verification; or
- Independent third-party certification of the track record for active strategies available on the platform.
To become GIPS-compliant, a firm must establish policies and procedures for calculation and presentation of performance that meet the requirements of the GIPS standards. Firms considering this route need to ensure there are dedicated personnel and resources available to maintain the required books and records, properly calculate performance, and produce and disseminate marketing materials that adhere to the GIPS standards. Starting with a sound framework will make maintaining compliance easier for firms as they grow.
The latest CFA Institute poll, combined with an increasing number of registrants each year on the GIPS standards website, indicates that GIPS compliance is on the rise. However, this is not always the best path for each firm. For example, if a firm is unable to meet all requirements of the GIPS standards or manages only model/theoretical assets, then the options for meeting the requirements listed above will be limited to a performance certification completed by an independent third party.
A performance certification is different from a GIPS compliance verification primarily in that the scope is limited to the specific track record(s) being examined. This allows for greater flexibility in the structure and methodologies used, but still satisfies due diligence concerns form a testing perspective. Firms still need to have written documentation of any assumptions used in calculation methodologies, valuation of assets, and books and records that substantiate and support the track record(s). The following is a non-exhaustive list of considerations that an independent third party may review when conducting a performance certification: transaction costs, timing of trades, pricing sources, cash, management fees/expenses, treatment of income and how these factors are accounted for in the calculation methodology.
Ultimately, any required performance certifications are intended to promote transparency. There have been a number of citations issued by the SEC over the last few years and databases can potentially mitigate risk and enhance investor confidence. When evaluating investment managers it is important that prospective clients are shown performance that is accurate and, in the case of any models, is not false or misleading.
ACA Performance Services held two webcasts in March that covered the challenges and considerations that firms may expect when reporting to various databases. For a replay of these complimentary webcasts, view our webcasts below.
Platforms Requiring Third-Party Performance Attestation: Implementing the GIPS Standards: On-demand webcast discussing how to implement the GIPS standards to meet advisory platforms’ requirement for independently verified performance returns.
Platforms Requiring Third-Party Performance Attestation: Model Performance Certifications: On-demand webcast discussing how model performance certifications can be used to meet advisory platforms’ requirement for independently verified performance returns.
About the Authors
Rosellen Bounds, CIPM, is a Senior Performance Consultant with ACA Performance Services working from ACA’s Jacksonville, Oregon office. Rose manages a diverse client base spanning the Western Hemisphere, leveraging over nine years of investment industry experience to her GIPS compliance verifications, performance certifications, and focused reviews for traditional and alternative investment managers. Prior to joining ACA in 2017, Rose served as a Manager with Ashland Partners & Company LLP, where she had similar responsibilities. In addition, Rose worked in Spain as a broker and in business line management and also she spent over six years at a national bank in operations management in the US. Rose earned her Bachelor of Arts degree with honors in Business Administration and her Bachelor of Arts degree with honors in Spanish (Foreign Languages and Literature) from Southern Oregon University.
Travis Morgan, CFA, CIPM, is a Managing Director with ACA Performance Services working from ACA's Jacksonville, Oregon office. His primary responsibilities include overseeing GIPS compliance verifications and other performance-attestation engagements. His client base includes firms across the US varying across many different asset classes and types, which gives him diverse experience in helping companies of all shapes and sizes come into compliance. Previously, Travis served as a Senior Manager with Ashland Partners & Company LLP, where he had similar responsibilities. Travis holds the Chartered Financial Analyst (CFA) designation and the Certificate in Investment Performance Measurement (CIPM) from CFA Institute. He has also helped develop the CIPM curriculum by writing chapter-end questions. He is a member of the CFA Society of Los Angeles. Travis earned his Bachelor of Science degree in Business Administration (Accounting) with a Certificate in Applied Finance and Economics from Southern Oregon University.