GIPS Compliance and Verification

Today I will continue discussing my phone conversations with Sean Gilligan (Longs Peak Advisory Services) last November about GIPS compliance and verification:

• GIPS compliance is required by many firms for models under purchase consideration.
• Unified managed accounts (UMA) have come into favor lately as opposed to wrap accounts. Instead of sending a client to me, I communicate the trade model (perhaps even buy/sell signals) to advisers who do the trading and pay me a percentage of (their stated) AUM for the model.
  

• One approach to marketing is to get approved by platforms like Evestnet that serve as portals (another intermediary added to the investing chain) to various TPAMs. Institutional advisers would likely require firms under consideration to be GIPS compliant.
• Investment management firms seeking GIPS compliance have usually identified a platform(s) onto which they want to be featured. The platform (as suggested above) requires its participant advisers to be GIPS compliant and verified. Some platforms have a minimum AUM requirement, which is important to know in advance.
• Institutions sometimes search investment manager databases (e.g. Mercer, eVestment) to find potential investment managers. They often include GIPS compliance as a search criterion.
• Gilligan suspects options are more in demand than I may think because most institutions have increased their allocation to alternative investments* over the years.
• GIPS compliance is established for a firm rather than a single strategy or account. This prevents people from choosing only well-performing models/accounts to be presented.
• Every discretionary account must fit into an existing GIPS-compliant composite even if different strategies are implemented. This explains how SMA performance could be standardized (and subsequently verified).
• People with a good strategy will often contract with Raymond James or LPL Financial; if GIPS compliance is the only hurdle then it would be well worth the expense.
• An institution looking to invest with me would prefer to be a small percentage of my total AUM. Just because I can execute a strategy with $1M doesn’t mean I can do it with $10M or more. Therefore, I will likely have to build my book from smaller accounts (not my ideal scenario).

Next time I will start to discuss the barrier to entry given all these considerations.


* Alternative investment is a broad category. I’d be interested to research this more.