Thursday, May 20, 2010

Necessary or not?

A GIPS(R) (Global Investment Performance Standards) client asked if a certain disclosure is needed. They, like a few firms, include language such as:

The collection of fees produces a compounding effect on the total rate of return net of management fees.  As an example, the effect of investment management fees on the total value of a client’s portfolio assuming (a) quarterly fee assessment, (b) $1,000,000 investment, (c) portfolio return of 8% a year, and (d) 1.00% annual investment advisory fee would be $10,416 in the first year, and cumulative effects of $59,816 over five years and $143,430 over ten years.

I am unaware of any reason to include such language. I know that some verifiers request (or require) firms to include this, but unless they can provide a reference for such a demand I'm at a loss as to why this is needed. I think that with all that's required, why invent new disclosures?


  1. The collection of fees produce a insights and opinions from an internationally recognized authority on investment performance measurement

  2. This firm includes this disclsoure to adhere to regulatory requirements. If firms choose to present only gross of fees returns in a one-on-one situation, the SEC requires that they show a representative example of the compounding effect/impact that fees have on the gross of fees return being presented. While not a GIPS requirement, it is certainly not a disclsoure that should be removed. As composite presentations often serve as the baseline of performance in a pitchbook to a propsect, the firm you reference likely has the need to blend GIPS disclosures with those also required for regulatory purposes. And this is why you see it so often, as you reference

  3. Maybe because compounding over time makes the managment fee exceed 1%. For instance, it will be much more than 1% over 10 years.

  4. The disclosure about the compounding effect of fees had been an important required exhibit as part of the original 1997 AIMR handbook. I don't know why it disappeared, but it provided very revealing information - maybe that's why!

  5. Nancy, thanks for your post. I may be having a "senior moment," but I don't recall that prior requirement. You may be right, though. Since it's not part of the GIPS requirements, I'm in favor of not showing it unless the firm finds value in it. I think most prospects understand this and don't need to be told.


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