Thursday, June 10, 2010

Let's hear it again ... why do you get examinations done?

During last week's presentation to the CFA Society of Philadelphia on the latest changes to the Global Investment Performance Standards (GIPS(R) 2010), I expressed my dislike for GIPS Examinations. I had a lengthy conversation with representatives from one firm that have them done to all of their "marketed" composites, a not unusual undertaking. When I asked "why" they do this, they seemed somewhat incredulous to being asked such a question, for surely the answer must be obvious. I think they thought this was a very odd question to ask, since it's so common in the States for examinations to be done. I went on to discuss this topic with the entire group during my presentation.

It is quite likely that firms spend 50% or more of their total verification cost on examinations, so understanding their true benefit is crucial. The truth is that they have little to do with GIPS; they test whether you're "cooking your books." Surely you know if you're doing this, so you don't need an outside party to tell you.

Firms become compliant primarily because of marketing benefits.
Firms get verified primarily because of marketing benefits.
And firms get examined primarily because ... perhaps it's because either (a) they were previously getting Level II Verifications done when they claimed compliance with the AIMR-PPS(R) or (b) because their verifier talked them into it. Please don't interpret the last point as a "shot" at other verification firms: many verification firms believe they're doing their clients a good service by conducting examinations; we just happen to disagree. If you're going to spend tens of thousands of dollars annually on examinations, shouldn't you have a good reason for it?

Our posture with our clients is quite simple: first, we discourage examinations because our research shows that they're rarely asked about in RFPs. However, if all of a sudden a client has an RFP that does ask about them and they feel obligated to have one done, then we'll make ourselves immediately available to do them, even if it has to be done over a weekend.

2 comments:

  1. Another AnonymousJune 10, 2010 at 8:51 AM

    In this "post-Madoff" era it might be useful to have an examination so that firms obtain some outside validation that they have not been "cooking their books." That said, it would be incorrect to believe that an examination eliminates the possibility of fraud, so perhaps the value in an examination is little more than a "warm feeling" as you suggest.

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  2. Thanks for your post; agreed. However, the manager knows whether or not THEY are a Madoff-look-alike and therefore need only go through the process if asked by clients/prospects. Otherwise, what's the purpose?

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