Wednesday, September 29, 2010

Is GIPS just for the institutional market?

I learned that some folks feel that there's a perception in the industry that GIPS(R) (Global Investment Performance Standards) only applies to institutional managers, and that retail need not apply. I found this somewhat fascinating, bewildering, surprising, and clearly erroneous.

In the early-to-mid 1990s, a firm that marketed to institutional clients had an ADVANTAGE by claiming compliance with the standards (the AIMR-PPS(R) back then), but today they're AVOIDING a DISADVANTAGE by complying.

However, in the retail space a manager has an ADVANTAGE by complying because most firms catering to this market don't. But this isn't because the standards don't apply. If your clients are high net worth individuals, clearly most (if not all) will never have heard about GIPS, which is fine. YOU can educate them about the standards. That they're a set of ethical principles that foster full disclosure of information; that they're globally recognized; that you invested significant amounts of time and money to comply; that they are viewed as the "best practices" for reporting performance to prospects; that you want to comply because you feel that by complying you're providing your clients and prospects with the best information to gauge your past performance. I could go on-and-on, but hopefully you get my point.

GIPS isn't just for institutions any more...the retail market is huge and waiting for managers to hop on the GIPS bandwagon.

2 comments:

  1. Sometimes perception IS reality. The retail market is generally uninformed and rather easily led, highly prone to emotional responses and too likely to trust so-called "advisers" who are simply salesmen. It's unlikely that these clients are ever likely to receive any education regarding the value of GIPS. And, they are likely to take comfort in the assurance that a regulatory agency like the SEC has provided approval for the products that have been sold to them. Even with the assurance that a composite has been created that passes muster with GIPS, this provides little assurance that the client is receiving unbiased guidance and a portfolio that has been created with their best interests in mind. No set of regulations turns sinners into saints, and GIPS compliance will not assure that the client has been put into an appropriate portfolio strategy or that their best interests are being served. In reality, the adviser probably just shows them a set of individual products from an approved list without any regard for how the overall portfolio will help them meet their financial goals. And GIPS-approved composites for a gaggle of individual products probably won't mean much to clients who are simply happy to have returns approved by a familiar regulatory agency. Agreed that retail clients need education, but it should probably start with more basic concepts that really matter, like what type of strategy they need, how taxes and fees prevent them from reaching their financial goals, and how the adviser relationship is fraught with conflicts of interest. We haven't gotten to the costs and benefits of active management, and yet active management is probably the only thing that these poor retail clients ever hear about. It's a rather sorry state of affairs, and I don't think that GIPS is the answer.

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  2. Thanks for your comments, Steve. The SEC provides pretty detailed requirements when it comes to mutual fund advertising, but this (of course) only applies to SEC registered firms. Other markets can probably benefit from the creation of rules. I understand that Joe Kennedy sold all of his positions when he was getting advice from his shoeshine guy. Too many individuals think they know what they're doing but more often than not don't. And I agree, some basic education would be quite helpful.

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