Okay, so yesterday we touched on the calculations for gross- and net-of-fee returns. But who should get what?

Prospective clients should get gross-of-fee returns, unless the net-of-fee returns are net of the same fee. The problem with most net-of-fee returns is that they’re net of a mix of fees: how can one easily understand what the number represents? If you’re going to show net-of-fee, provide helpful information so that the reader can better interpret it. Under the “old” AIMR-PPS(R), firms were required to show their weighted average fee, which could be helpful to interpret the return; but this is neither required nor recommended in GIPS(R) (Global Investment Performance Standards). In some cases, regulators (think SEC) require net-of-fee under certain circumstances, so it becomes a requirement. To me, gross-of-fee should be a requirement for marketing to prospects. Showing both is probably the ideal, even given the NOF’s shortcomings.

Existing clients should get net-of-fee reporting. This represents the manager’s performance after the fee they’re charging has been removed. This seems best for the client.

Arguably, both prospective and existing clients should also see net-of-taxes (i.e., after-tax) returns, too. And, net-of-risk (i.e. risk-adjusted) returns.

p.s., The 2010 edition of GIPS now requires firms to indicate whether their NOF returns are net of actual or “model” fees (see ¶ I.4.A.6.b).