Friday, June 29, 2012

Can a GIPS-compliant firm show a "rep" portfolio? Should the UAPS permit them?

I had a recent conversation about the UAPS (Universal Advisor Performance Standards), which provides the ability for a compliant firm to show a representative ("rep") portfolio's performance. I mentioned that the white paper is a draft and subject to change. However, we recognize that it's possible some firms may want to show such information, and therefore feel we need to address it; at least at present.

Reference was then made to the Global Investment Performance Standards (GIPS(R)):
  • Question: Can a GIPS-compliant firm show a rep account's performance?
  • Answer: Yes! Nowhere in the Standards is this prohibited.
Why would a compliant firm choose to show a rep portfolio's information?
  • To provide performance attribution results
  • To show actual holdings and trading
  • To provide additional insights they may feel would prove helpful to the prospect
I am also aware that investment consultants sometimes ask to see a rep account.

Such information should be considered "supplemental." In addition, it should include appropriate disclosures, to ensure the recipient understands what they're getting.

But rep portfolios not allowed? Of course they are!

While they aren't specifically PERMITTED (see below, they actually ARE addressed!), the fact that they are not explicitly PROHIBITED means that they can be employed. Clearly (a) best practice is ALWAYS the composite presentation, and (b) compliant firms are obligated to make every reasonable effort to provide the appropriate compliant composite presentation to the prospect. If they can give them a rep account's details, they shouldn't have any difficulty giving them the composite presentation, too! And (c), we would expect appropriate disclosures to be included with any rep portfolio details, to alert the reader of the possiblity that it was cherry-picked.

The Supplemental Information Guidance Statement actually makes reference to representative portfolio information being permitted:
Disagree? Have a different opinion, additional thoughts, or insights? Please share them below.


  1. Stephen Campisi, CFAJune 30, 2012 at 11:54 AM

    This is a very challenging area for those who manage "total portfolios" of client financial assets. Think of the typical investment advisor who manages all of an individual's money. This account is likely to be highly personalized according to the individual's unique risk tolerance, return goal and unique preferences. This could limit the advisor's selection of asset classes ("no hedge funds") or sectors ("no sin stocks") or even companies ("no Walmart.") In addition, the advisor may be educating the client over time, with the very positive result being an increased degree of diversification and risk management. That said, this portfolio is likely to have an "evolving" asset allocation and will not fit nicely into any standard grouping of accounts. It is aimed at looking like the advisor's best thinking in terms of strategy, but it will take years to get there.

    So, what is this advisor to do, given that his client list includes many suitable and successful portfolios, with a fairly high degree of dispersion of performance results due to the unique nature of the clientele that he/she serves? Some would consider it unrepresentative to include all of these into a single composite, even if they were all targeted to a given strategy (perhaps 60% equity and 40% bonds.) It would be meaningless to assign each to a composite. And, it would seem like "cherry picking" to select any of these as a representative account. In this context, a paper portfolio might be the most "representative" illustration of the manager's best thinking and its results.

    Clearly, this doesn't sound anything like GIPS. But let's remember that GIPS serves managers of single products which are generally NOT customized to client preferences to any significant degree. That works for each little piece of the portfolio mosaic, but for those who manage the entire portfolio, GIPS is less relevant, and often not applicable.

    Personally, I think that including all accounts for a single investment mandate into a single composite is a good idea, since these DO fit into a standard broad asset allocation scheme (e.g. 60/40 without alternatives vs 60/40 with alternatives.) The dispersion of results is something the manager has to live with, but this is easily explained by providing information on the dispersion of unique client "tweakings" of the strategy. The practical reality is that managers DO assign clients to a category of risk and DO allocate their assets according to prescribed guidelines - not exactly, but close enough to be representative. This means that the idea of a composite is NOT out of the question as some suggest. We just need to understand and explain the dispersion of results that customization produces - and be ready to explain it. This is much better than simply surrendering the fight and refusing to show anything to prospects.

    As to a representative account, it's a good idea, provided there are controls to establish this at a fixed date and mandate a process to maintain credible trade data and a paper trail to ensure that the advisor's recommendations are implemented in the model portfolio. I have found that clients are used to seeing model portfolios when they examine strategies. If they are willing to put their trust in representative accounts, why shouldn't we?

  2. Steve, thanks for sharing some great insights. Nice to get some practical, real life commentary. (BTW, I shared this with the UAPS board).

  3. As general comments to the UAPS white paper:

    There are limits to GIPS, some of which are detailed in the UAPS white paper. Although GIPS is rigid, this rigidity is the characteristic that gives it the teeth needed for real world comparability across the investment industry . There are two major flaws I find with UAPS. First, the segment of the investment market or “type of account” it claims doesn’t fit under GIPS can actually be covered under GIPS. Second, in the absence of using actual accounts and grouping them into composites UAPS relies largely on model portfolios which can be misleading and opens firms up to liability.

    UAPS outlines 3 types of accounts that don’t fall under the realm of GIPS, discretionary, hybrid and nondiscretionary. Congruent with GIPS, UAPS argues that hybrid and nondiscretionary accounts have no place in composites, however it claims discretionary accounts can be grouped together albeit with different standards. I see no reason why the discretionary accounts can’t be grouped under GIPS. I believe a lot of the confusion with GIPS relates to 1)how organizations define “the firm” and 2) firms use the term portfolio and account synonymously.

    Most organizations that want to be GIPS compliant want their entire organization to be grouped under one roof. The most practical way, and as described by GIPS is to group separate investment decision making bodies into their own firm. In many of today’s broad organizations this would equate to several “firms” falling under the roof of the larger organization. Although this seems counterintuitive at first it actually makes perfect sense. When a client seeks investment advice they actually receive it from the more immediate investment decision making body not from the separate and fragmented offices that make up the broader organization.

    Firms also use the term account and portfolio as one in the same when in actuality they are not. The most basic portfolio is a single account number consisting of stocks and bonds. As permitted by GIPS, a portfolio could also be several account’s grouped together to form an overall strategy. Defining the overall strategy (60% equity, 40% fixed income) when defining the composite allows the firm a broader definition of a composite that would fit most investment advisor’s real world applications.

    The second contention I see relates to the use of model portfolios when presenting past performance to a client. The conflicts inherent in this practice are numerous and misunderstanding of what constitutes a model portfolio is widespread among the public. Creating model portfolios ex post and presenting their performance as a basis for future returns opens firms up to large liabilities and conflicts of interest. Although the majority of investment professionals have high ethical standards the ease of masking model or “hypothetical” portfolios behind an industry standard will be exploited.

  4. Dan, thanks for sharing your thoughts. I will pass them along to the committe.


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