Ronald Reagan made famous the Russian proverb, ‘Trust, but Verify’. Forbes magazine writer Frank Armstrong III also wrote an article a few years ago using that proverb as its title.  In that article, he stresses the importance for investors to adopt that same mantra when dealing with financial advisors. He also states a good advisor is one that has a straightforward and transparent business model which allows for clients and third parties to check their

Consider the following scenarios:

• An advisor provides the back history of a mix of investments that he is currently showing to prospective clients. These historical returns represent a mixture of actual portfolios and hypothetical returns that would have been achieved IF he had held these funds at the time.
• An advisor has very poor results in a handful of client portfolios that held a common investment that went bad. These clients all terminate the relationship and move their accounts elsewhere. The advisor makes the decision to not include these client returns in the performance he shows to prospective clients. He only shows the performance of existing accounts.

Neither of the representations made in the two scenarios above are allowed under GIPS (we should have a Registered Mark symbol here for the first instance of this use), or the “Global Investment Performance Standards”. The Global Investment Performance Standards are an ethical set of standardized, industry-wide principles that provide investment firms, like WealthPlan Partners Group (“WPG”) with guidance on how to report investment performance to prospective clients.

A New Standard for Investment Firms

These standards function as a way for investment management firms to compete globally or locally with other firms according to these regimented standards.  These rigorous standards allow for investors to have the ability to make sensible and informed decisions between two investment firms.  Firms that are GIPS compliant have thus made the commitment to undergo a rigorous full-scale review by a properly credentialed GIPS verification provider. Thus, if a firm has gone through the GIPS verification process, they have satisfied a standard of excellence that many other firms cannot match.  A firm that has satisfied compliance with GIPS cannot show “cherry-picked” performance, or include one stock that did well and exclude another that tanked.  GIPS will not allow for these types shenanigans., Being GIPS compliant is a lot like reporting a golf score: GIPS compliance doesn’t allow mulligans or toe wedges and counts every putt!

A riddle for you all:

You can have me but cannot hold me;
Gain me and quickly lose me.
If treated with care I can be great,
And if betrayed I will break.

What am I?

The answer is trust. It is the cornerstone of any business transaction and vital for the continued health of a practice. GIPS is a seminal component in building that bond of trust with a potential client, and maintaining, strengthening, and deepening that bond with an existing one. These standards outline how to calculate and present investment performance utilizing principles of fair representation and full disclosure.

A New Era of Investment Compliance

Created by the CFA Institute, GIPS Standards outline the creation of composites, what strategies are included or not included in a composite, and how returns are presented. All this information is then reviewed by a third-party GIPS verification  firm to ensure compliance. Thus, the adoption of GIPS enhances the transparency of returns, while also enabling accurate comparisons of a firm’s returns to that of other firms. This in turn should deepen the trust an existing client has with their advisor.

A GIPS compliant firm should enhance a prospective client’s confidence in the firm’s strategies as well as the integrity of the firm.

Why Join a Firm That is GIPS Certified?

Beyond encouraging client confidence, firms that adopt GIPS standards also do not have to satisfy varying markets employing different standards all over the world.  The GIPS standard is singular and absolute and need not bend to meet other markets.  This means that a GIPS compliant firm has met a standard that is used everywhere and is seen as the authority in performance compliance.

Case in point, according to Cerullii Associates, over 48 markets have adopted GIPS as the gold standard in performance presentation, with over 1800 organizations worldwide claiming compliance. GIPS Standards is a living entity maintained by the volunteers in the investment community belonging to the CFA Institute, who ensure any revisions continue to benefit the investment firms, advisors, and their clients.

Circling back to the adage, ‘Trust, but Verify,’ adoption of the GIPS Standards helps both parts of that saying.

Verify: Clients are provided the tools to easily make apples-to-apples comparison of returns between strategies belonging to different firms, empowering them to better conduct due diligence on their choice of investment advisor and be confident in their choice. This would in turn help build and strengthen a client’s Trust in their advisor.

Additionally, as more firms adopt the standards, this can create a positive feedback loop as it becomes  necessary to adopt these standards to be viewed as a transparent practice, further enhancing clients’ trust in the Standards and those who adopt them.