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Mark Matson

Practice Management > Building Your Business

How GIPS Can Help Advisors Boost Client Confidence

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What You Need to Know

  • Global Investment Performance Standards (GIPS) were created to establish a more uniform process for financial institutions to report returns.
  • This can be a lengthy and costly process, but it’s worth the investment to show credibility.
  • Advisors who are GIPS-compliant may have an easier time under the SEC's new Marketing Rule.

You can be savvy and sophisticated and still become the victim of a financial scam. After all, when Bernard Madoff’s 20-plus-year Ponzi scheme was finally exposed, his long list of victims included billionaire business owners, entertainment moguls and highly esteemed charities, as well as banks, hedge funds and feeder funds. The FBI estimates that every year, Americans lose $40 billion to investment fraud.

Short of operating a billion-dollar fraud operation, some advisors could mislead their clients in much smaller ways, by cherry-picking returns or by failing to be transparent about fees and expenses and how they affect returns. But investment professionals have an opportunity not only to comply with regulations, but to go above and beyond to help inspire investor confidence.

On the most basic level, investors can start to protect themselves by doing financial due diligence — verifying third-party statements from an independent custodian, reviewing audited financials and requesting independently verified returns. Educating clients in these areas can provide advisors with a unique opportunity to build trust with them.

In addition to living by the fiduciary standard, becoming compliant with Global Investment Performance Standards (GIPS) can help create confidence and transparency in your relationships with your clients.

These standards were created by the Chartered Financial Analyst (CFA) Institute to establish a more uniform process for financial institutions to report financial returns. Today, becoming GIPS-compliant is considered the gold standard in the industry, allowing investors to compare one firm’s performance against another in the United States and across international borders.

For advisors, becoming GIPS-compliant should be standard practice, no different from a physician who is board-certified or an attorney who is licensed to practice law within their state. Though there are 14,806 SEC-registered advisors, only 1,714 financial firms — or 8.13% — claim compliance with GIPS. Becoming GIPS-compliant can be a lengthy and costly process, but it’s worth the investment to show credibility to potential investors.

Under GIPS, an advisor uses a time-weighted rate of return to calculate account/portfolio performance. This metric takes investor behavior out of the equation and puts the performance squarely on the advisor’s skills.

Alternatively, non-GIPS-compliant advisors can show results less transparently, such as highlighting returns from one client while ignoring another client with a similar objective who didn’t do as well. Some RIAs have had weak auditing methods, even buying software to generate hypothetical data and then passing those off to their clients as real returns.

Beyond performance and comparability, a GIPS-compliant advisor must provide their clients with access to transparent information about the investments themselves. It’s encouraging to see the industry moving in the right direction. In addition to providing transparency to clients, being GIPS-compliant can also help advisors meet more strict guidelines set by the Securities and Exchange Commission under the new Marketing Rule to offer investors a clear picture of their firm’s performance record.

Fortunately, firms that are already GIPS-compliant will likely be prepared to handle and comply with SEC regulations because they’re already using composites and have resources dedicated to ensuring the full disclosure of their investment performance. Non-compliant firms, however, will likely find that they need to invest significant resources to meet requirements and record-keeping standards. So, if you’re an advisor who is not already complying with GIPS, now might be a good time to ask yourself, “Why not?”

Every financial professional should go above and beyond to demonstrate trust and transparency by adhering to the fiduciary standard and placing their client’s interests above all else. Now more than ever, investors have many options when it comes to where and with whom to invest their money. If advisors want to earn the trust of their clients and prospects — and win their business — complying with standards like GIPS should simply be a given.

Mark Matson is founder and CEO of Matson Money, an asset management and advisor coaching firm with $9.6 billion in assets under management (as of January 2023) that provides outsourced investment management, education and tools to over 500 advisory practices across the U.S., Puerto Rico and Canada.

(Image: Shutterstock)


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