Top 5 Issues in Annual Disclosure Presentations

By Alexander Cook, CIPM

During the course of a verification, we as verifiers review the firm’s GIPS® compliant disclosure presentations. For new and experienced firms alike there are usually a few things that are brought up and discussed. The following are examples of the most common areas firms question or have problems with during a verification.

#1 Claim of Compliance

One of the most common issues we see amongst advisors who are new to GIPS is the claim of compliance. For firms that have been verified, GIPS requires one of two claims of compliance be used in every GIPS compliant disclosure presentation. Which claim of compliance is appropriate to the given disclosure presentation depends on whether or not the composite receives a performance exam.Oftentimes advisors who are new to GIPS will add content to the language of the claim of compliance. For example, an advisor might think that “XYZ Investments is a registered investment advisor that claims compliance with the Global Investment Performance Standards” fulfills the requirement to disclose the firm’s definition as well as the requirement for the claim of compliance. However, the claim of compliance must contain the exact wording of the claim of compliance set forth in the GIPS standards. In this scenario, we as verifiers would need to receive a revised disclosure presentation with the correct claim of compliance prior to issuing an opinion.

#2 Model Returns

Many advisors who are new to GIPS have questions about model returns. While GIPS does permit model performance to be shown as information that is supplemental to the compliant presentation, linking model returns to actual returns is not allowed.The underlying principles of the GIPS standards are fair representation and full disclosure. With that being said, linking model returns to actual returns is not allowed as it is considered misleading and unrepresentative of the composite’s performance.

#3 Fee Schedule

GIPS requires that the fee schedule be disclosed for the compliant presentation. Oftentimes fees can vary between individual accounts within the composite. It is important to remember that the fee schedule must reflect the firm’s investment management fees that are applicable to prospective clients for the particular composite. For example, if the fee schedule is 1% on the first $1 million, 0.75% on the next $4 million, and 0.50% on everything over $5 million, a disclosure which reads “the fee schedule for ABC composite varies from 0.50% to 1%” is not acceptable. It is important to note that referencing another document that includes the fee schedule does not satisfy this requirement.

#4 Inception Date vs. Creation Date

GIPS requires the composite’s creation date be disclosed.  The composite’s creation date is the date that the firm decided to group the accounts together into a composite. This is not the same as the composite’s inception date – which is the initial date of the composite’s performance record. It is possible for the composite’s inception date and creation date to be the same, but in general they are different.

It is common for advisors who are new to GIPS to confuse creation date for inception date and incorrectly disclose the composite’s inception date. There is nothing wrong with disclosing the inception date, but for GIPS purposes it’s important to remember that it is mandatory to disclose the creation date.

#5 Changes to the Benchmark

During the history of a composite it may become necessary for the firm to change the benchmark that the composite is being measured against. Whatever the reason for the change, it is important to remember that the benchmark should never be changed primarily to make historical performance look better by lowering the benchmark return. The firm must disclose the date of, description of, and the reason for the benchmark change. In addition, firms are encouraged to continue to present the old benchmark.

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