The end result of a firm’s efforts when claiming compliance with the Global Investment Performance Standards (GIPS®) is the delivery of a fully compliant presentation to prospective clients. This is often distributed alongside the firm’s other marketing materials. The required statistics and disclosures that must be included in a compliant presentation are clearly listed in published guidance. However, many advisors have questions on topics that are not clearly documented in the GIPS Handbook, and elsewhere. These questions often revolve around best practices for marketing, and in the following piece we present three topics for consideration.
Best Practice #1: Books and Records:
Having sufficient books and records to support performance is a fundamental element of GIPS compliance and other regulatory requirements. From a GIPS perspective, this is addressed under Provision 1.A.1: “All data and information necessary to support all items included in a compliant presentation must be captured and maintained.” A common question we receive involves how much documentation is considered sufficient. All the recommended and/or required elements of a compliant presentation must be supported by underlying documentation. If all figures are computed within an accounting system, then downloading and saving system reports as back up could be a good baseline practice for sound recordkeeping.
Firms should also consider saving supporting documentation from any independent third-parties (such as custodial statements, broker statements, performance results provided by the firm’s consultants, etc.). Ideally, firms would have internal documentation that can be substantiated by third-parties acknowledging that pricing and accounting differences can and do arise. In addition, many global regulatory bodies tend to place greater value on third-party books and records vs. internal performance system records. Regardless, a good rule of thumb is that firms should only show performance and other reporting metrics if supporting books and records are available.
Best Practice #2: Updating performance and presentations:
Not all firms have equal resources, but when practicable, firms should have one designated individual/group be responsible for generating performance and another individual/group be responsible for updating the firm’s marketing materials. Both parties should also communicate regularly to minimize the potential for errors. We often find discrepancies between the performance and other statistics generated from firms’ accounting systems and what is included in marketing pieces. This is generally caused by one or both of the following reasons:
- An individual updated figures in the system and never communicated the changes to the marketing team so that deliverables could be revised, or
- An individual only updates certain information within the marketing books and not all potentially affected items. For example, the performance for a given account may be updated, which is captured via updated composite returns, but there is a risk that other reported statistics such as internal dispersion and three year annualized standard deviation, may not reflect this update.
To avoid running into such situations, we recommend having separate groups responsible for performance and marketing. We also strongly recommend restricting access to data within firms’ systems to only designated individuals. This will strengthen internal controls and prevent unauthorized changes to data and/or marketing materials. When changes do occur, a useful control to have in place is to recalculate all reported statistics to ensure no further changes are needed. Once this process is complete, the changes can be communicated to the marketing team or person in charge of making those updates. We also recommend maintaining a log to document the dates, reasons for updates, statistics impacted by the updates, and the materiality of the changes. A similar policy can also be implemented for changes to disclosures.
For smaller firms, where separate departments might not exist for performance and marketing, a similar process can still be adopted (i.e. creating logs). Once the system is updated, the individual can document the changes in the log and update the marketing presentations to reflect the current data.
Best Practice #3: Review and tracking of marketing presentations:
Once the performance is finalized and marketing presentations are populated, a common practice and practical internal control to have in place is to review the presentations prior to dissemination. Ideally, this review should be completed by someone on the compliance team, although other employees from the marketing or operations teams can also act as the reviewer. Having a robust review process for marketing materials reduces the risk of errors and inappropriate marketing practices.
Common areas to review can include, but are not limited to:
- Review benchmark appropriateness;
- Ensuring the accuracy of all reported statistics and disclosures;
- Ensuring that model performance is not linked to actual performance;
- Reviewing to confirm that non-portable results are not linked to ongoing performance;
- Choosing the correct representative portfolio; and
- Ensuring changes to data and disclosures are appropriate and documented.
Firms should also consider a mechanism to track presentations. A CRM tool is a great method for tracking presentations, but tracking can be maintained in any form such as an Excel spreadsheet, Word document, or even handwritten notes. From a GIPS standpoint, firms are required to provide compliant presentations to all prospective clients at least once every twelve months. As such, it is important for firms to track who receives these presentations. In addition, for as long as the client is deemed a prospect, firms are obligated to fulfill this requirement. From a general regulatory compliance standpoint, it is important to track all firms’ marketing presentations, not just compliant presentations provided to prospective clients. The reason being that in the event of any material changes, firms can easily identify all parties that have received the old versions. Best practice is to have policies and procedures in place to address what steps to take when errors in any marketing materials have been identified.
Although the GIPS handbook makes a comprehensive attempt to address all topics pertaining to the GIPS standards, firms continue to struggle with processes around the creation and distribution of marketing materials. The best practices noted above will help mitigate the risk of distributing an erroneous presentation. When in doubt, seek counsel, including from verification firms to discuss any potential issues or questions relating to marketing best practices.
About the Authors
Joel Bernardin, CFA, CIPM, is a Managing Director with ACA Performance Services, a division of ACA Compliance Group. Working from our New York City office, Joel verifies investment-manager GIPS compliance and conducts various performance-attestation for investment firms. He specializes in derivative and alternative investment engagements. Joel also serves as the relationship manager for more than 90 clients at ACA. Joel earned his M.B.A in Finance from The Peter J. Tobin College of Business at St. John’s University and his Bachelor of Science degree in Applied Mathematics and Statistics from Stony Brook University.
Nadeem Aftab, CPA, is a Principal Consultant with ACA Performance Services. Nadeem’s primary responsibilities include verifying a firm’s claim of compliance with the Global Investment Performance Standards (GIPS). In addition to that, Nadeem is also involved in other performance attestation services such as performance examinations and independent performance certifications. Nadeem’s client base includes advisors in the continental United States as well as the United Kingdom. Prior to joining ACA in 2017, Nadeem was a senior associate at Ashland Partners & Company, LLP, where he had similar responsibilities. Nadeem earned his Bachelor of Science degree in Accounting and Finance from the CUNY College of Staten Island and is a licensed CPA in New York.