One aspect of the Global Investment Performance Standards (GIPS(R)) which can be a challenge to deal with is to identify who the client is. While this may seem to be a “no brainer,” it isn’t always.

Let’s consider mutual funds. Are the shareholders clients? I believe the consensus opinion is that “no, they aren’t.” At least for GIPS purposes. That is, a mutual fund manager isn’t obligated to provide prospective shareholders GIPS compliant presentations. The fund itself is the client.

What about private equity partnerships? At first glance it appears that they’re analogous to mutual funds and therefore the prospective partners wouldn’t constitute clients for GIPS purposes, but rather the partnership itself would be the client. However, this seems to be a bit of a gray area. A private equity manager is the general partner of the plan and is seeking limited partners to participate. There is a whole host of rules regarding private equity and so wouldn’t we expect that potential partners to receive materials that align with the GIPS standards? Further clarity here may be in order.

In the case of wrap fees the asset manager actually has some flexibility when handling the accounts for GIPS purposes, but I’d say it’s generally agreed that the sponsor of the wrap fee program is the client.  The participants themselves, even though they have their own accounts, wouldn’t be clients for GIPS purposes.

We’re working with a verification client who is the manager of some 401-K programs, and this question arose during the course of the review. At first, because each account is sitting on the manager’s system, I believed that THEY should be the clients. However, as with wrap fee programs, the 401-K sponsor selected the manager, and therefore for GIPS purposes the sponsor is the client; the individual participants in the plan are not.

Guidance on client definition would, I believe, be a helpful addition to the GIPS materials … perhaps after GIPS 2010 is done?