Wednesday, November 9, 2011

Who's the client? (revisited)

One of our GIPS(R) (Global Investment Performance Standards) verification clients posed the following question: "We have had the question come up here as to whether a potential limited partner in a partnership that we manage (managed in a similar manner to a mutual fund) is required to receive a GIPS compliant presentation?"

This raises the question as to who the client is?, for GIPS purposes. Our client cited a post I did more than a year ago.

As with a mutual fund, I would argue that for GIPS purposes, the "client" is the partnership, not the investors in the partnership (for a mutual fund, the fund is the "client"). The prospective shareholder/limited partner isn't investing in the composite's strategy; they're investing in a particular product, which no doubt comes with loads of disclosures that will give them all the information they require.

Might it be a good idea to include the appropriate composite presentation(s)? I would say, "yes," though only if doing so doesn't conflict with local regulators, who might have rules that make this inappropriate. But in my opinion, it's not required.


  1. hey David,

    I am working as Performance Measurement developer and last couple of months working on GIPS. I have been following your blog for a while since I know you from your book :) it is a guide book for our developers in my group .

    I don't really understand this post. When you say "client is the partnership,not the investor in the partnership. what does it mean?

  2. Vincent, thanks for your note. Clarity is probably in order, and this note may not suffice, so I'll probably do something next week which is a bit more in-depth.

    The standards require compliant firms to do certain things for their "prospective clients," such as to make every reasonable effort to get them a compliant presentation. WHO the client is can be a challenge at times.

    For example, the standards provide flexibility when it comes to wrap fee accounts: either the wrap fee sponsor (e.g., Merrill Lynch) can be "the prospective client," or the individual investors can be. The reality is that the manager doesn't SELL to the individual investors (the sponsor has their own financial advisors who do this); rather, the manager SELLS to the sponsor. But for composite purposes, the firm can choose to manage the individual investor's portfolios (let's say, 10,000 across five sponsors) or just the sponsors. Clearly this can make a big difference in how the composite is constructed and maintained.

    The same issue arises with mutual funds and limited partnerships. WHO is the prospective client?

    Again, I'll take this up in greater length. Thanks!


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