GIPS Advertising Guidelines

Many firms now choose to implement GIPS standards. This is primarily due to increasing competition from other firms that already do so—which shouldn't be a surprise, as more investors are beginning to recognize and understand the benefits that the GIPS standards provide. And as they jump on the bandwagon, firms often want to advertise their GIPS compliance, but without publishing all the presentation data that GIPS requires. Why do you suppose they'd want to leave out that data?

No. That's part of the purpose of the GIPS standards: to promote client understanding and engagement.

Not really. Since there's more awareness of GIPS standards and the reporting requirements, the data wouldn't necessarily confuse clients.

Additionally, GIPS standards specify that advertisements include any written or electronic materials addressed to more than one prospective client, regardless of the medium used. "Client" here indicates one financial unit, so trustees or a retired couple are considered one client. What would be considered an advertisement?

No. That's not an advertisement, since it's only to one person.

No, actually. A board oversees one portfolio, so it's one client.

GIPS standards have specific provisions related to this advertising. For example, all advertisements must use the specific language when claiming compliance in an advertisement, and they must include a definition of the firm. What else might help prospective investors that see the firm's advertisement?

Well, no. GIPS standards concern transparency, so account opening isn't a concern.

That's not it. Performance presentations have specific requirements to be GIPS compliant, and an advertisement won't work for that.

Additionally, GIPS standards allow firms to present performance with certain requirements. For example, firms must disclose the composite description, whether the performance is net or gross of fees (or both), and the currency used. But do you think firms are allowed to present their best performance only?

No way. GIPS standards would never allow firms to cherry pick their best performance. That's unethical.

Not really. That defeats the purpose of using an advertisement instead of a presentation.

But the composite performance isn't the only GIPS requirement. What's missing that will help prospective clients evaluate the composite's performance?

No. That's not going to help clients evaluate full performance, only the amount paid for management.

Requiring a benchmark disclosure ensures that clients can evaluate the performance. What requirement might help clients evaluate risk?

Not quite. That will help clients see how the manager implemented the portfolios, but it's not a direct performance evaluation.

No. The composite's liquidity needs don't directly impact risk.

Clearly, yes. GIPS standards require that firms disclose the presence, use, and extent of leverage, derivatives, and short positions, if material, including descriptions that spell out the frequency of use and the characteristics of the instruments sufficient to identify risks. Firms may also include other relevant information that meets the GIPS standards, but it must not be given greater weight than the required information, and it must not conflict with the guidelines or GIPS standards.

Not really. The composite's time horizon might explain returns, but not risk.

To summarize: [[summary]]

Yes indeed. The data can make a simple advertisement simply ineffective because there's just _so_ much data required in the presentation. Most prospective clients would be overwhelmed by such an ad. The GIPS advertising guidelines were developed to address this issue, but it's important to note that they don't replace or exempt firms from compliant presentations, and that when an advertising conflict exists between GIPS standards and the law, the law will take priority.

Exactly. A letter sent to prospective investors is a form of advertisement, and the GIPS advertising guidelines apply to all forms of advertising that reach multiple people.

Right you are. GIPS standards require that firms that claim compliance through an advertisement also include information about how to obtain a compliant presentation and/or list of the firm's composite descriptions.

That's right. GIPS requires a consistent amount of performance data to be presented. But the firm can choose one of three required datasets to present: - the one-, three-, and five-year annualized composite returns through the most recent period; - the period-to-date composite returns in addition to the one-, three-, and five-year annualized composite returns through the same time period as a compliant presentation; or - the period-to-date composite returns in addition to five years' of annual composite returns calculated through the same period of time as presented in the corresponding compliant presentation. If the composite isn't five years old, firms must also present the corresponding returns since the composite inception date. For any of the options chosen, firms must identify the period-ending data and must not annualize returns for periods less than one year.

You got it. The benchmark return will help clients evaluate how the composite has performed compared to the market, so GIPS standards require that firms present the benchmark description and the benchmark's total returns for the same time periods as the composite. The benchmark must be the same as the one presented in the presentation, and if the firm determines that no appropriate benchmark exists, it must explain why.

Publishing all the data can lead to a lot of pesky questions from clients

Publishing all the data can confuse clients and hinder client relationships

Publishing all the data per GIPS requirements makes the ad long and expensive

A one-on-one report

A report given to a fiduciary board

A letter sent to prospective investors

Instructions on how to open up an account

Information about the firm's best performance and vintage year

Instructions on how to obtain a GIPS-compliant presentation or composite

Yes, since that's what clients can expect from the firm

No, all 10 years of required performance data should be presented

No, a consistent, limited amount of performance data should be presented

The fees charged

The benchmark return

The internal dispersion statistic

The composite's liquidity needs

The composite's investment time horizon

The composite's use and presence of derivatives

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