#4 GIPS Performance Examinations

We have always been big supporters of GIPS(R) (Global Investment Performance Standards) verifications: given the Standards’ complexity, it is very easy for firms to make mistakes.

At one time it was expected that verifications would become mandatory, but this idea was met with much opposition and was (fortunately) derailed. However, the importance of verification has been heightened as a result of the rewording and expansion of the “claim of compliance” statement in composite presentations, and the market has, in fact, made it a de facto requirement.

Examinations are a totally different matter. They are GIPS’ version of the AIMR-PPS’ Level II Verification. The following schematic summarizes the history of these reviews:

Examinations test to see if the firm is “cooking its books,” and has little to do with the standards themselves.

While it’s true that firms (a) move to compliance and (b) undergo verifications primarily for marketing purposes, the rationale behind examinations is less clear, especially since most RFPs fail to ask about them. We believe that for many firms they are simply a continuation of their Level II verifications, that were done when many large verification firms wouldn’t do Level I’s. And while this is no longer the case (i.e., these same verifiers will do GIPS verifications), the practice has continued.

We discourage our verification clients from having them done, and very few do (even those who used to, have, for the most part, stopped). This has resulted in tens of thousands of dollars in savings each year for our clients.

If a firm IS going to have examinations done, they should only be for those composites for which they have seen interest in having them done by their prospective clients. We have seen cases where verifiers perform them for all of the firm’s marketed AND non-marketed composites: the only one who benefits from this is the verifier.

If yours is like most firms, chances are you’re spending a lot of money on examinations each year. Do yourself the favor of asking “why?”