GIPS: What’s Keeping You up at Night?
Our webinar on GIPS compliance raised some interesting questions that got us thinking: why should asset managers comply with GIPS? On the flip side of that coin, what is it about not complying with GIPS that worries asset managers?
In a word, the answer is: uncertainty. Although we see a clear and present necessity for the adoption of GIPS, we heard during the Q&A session that it’s not always obvious to everyone else. For example, as Carl Bacon pointed out, it’s often easier to identify the costs associated with adopting GIPS, but how do you measure the benefits? One way to think about it is to consider non-adoption as a business disadvantage, rather than a marketing disadvantage. In the post-Madoff era, complying with standards that position you as credible and trustworthy will have distinct benefits in terms of client acquisition and retention.
Participants also raised a question about hedge funds and private equity firms: is GIPS relevant to these organizations? Bacon agreed that compliance might not be a top priority for these firms, noting that internal rates of return might be a better way to measure performance, but even in that case, the trend in greater regulatory oversight over hedge funds and private equity means that these organizations should at least be aware of how GIPS evolves, so they are ready to get on board if needed.
Another concern: how does GIPS affect smaller firms vs. bigger firms? Interestingly, adopting the standards may be easier for smaller organizations. These firms tend to have fewer funds under management and often have a shorter history – GIPS compliance requires incorporation of five years’ history for risk and pricing data. In fact, GIPS could be a major differentiation point for smaller companies looking to demonstrate a fair representation of their advantages to their clients.
Finally, verification: how important is it to have one of the Big Four verify your GIPS status? The answer: it’s not. Far more important is independent verification by a respected firm. Big Four status place a small role here – most clients just want the reassurance that if you say you’re GIPS compliant, you really are. Doesn’t matter whether that verification comes from a big auditor.
So what about you? What uncertainties do you have when it comes to GIPS? How have you tackled the challenges of implementing these standards? What has held you back? We’d love to hear your stories.