Monday, December 9, 2013

How often should a GIPS compliant firm be verified?

The Spaulding Group surveys on the Global Investment Performance Standards have consistently shown that most compliant firms get their verifications done annually. But is this the optimal frequency? Well, let's consider this topic for a moment.

How about more often than annual?

A couple verifiers we know encourage quarterly verifications. We believe strongly that this most benefits the verifiers themselves, as it allows them to keep their staff busy throughout the year. The disadvantaged are, in my view, the clients themselves. Why? Because we believe that quarterly is:
  • Too frequent. There is nothing to be gained from having your verifier show up four times a year.
  • Disruptive. Having your verifier come to your offices four times a year can create stress and create frustration. But even if your verifier is one who rarely shows up to your offices (but insists on doing their work remotely), you still are disrupted: you've got to gather materials together four times a year and answer any questions that arise, which takes time away from your normal and no doubt more productive activities.
  • Potentially more expensive, since there is no economy of scale that you're taking advantage of.
And so, we strongly oppose such a level of frequency. Mind you, we like to be kept busy throughout the year, too, but we offer many other services (e.g., consulting, operations reviews, systems  reviews, training), and so spend time doing these activities rather than revisiting our clients' offices three more times (recall that we only do "on site" verifications).

How about less frequently than annual?

By having verifications done less than annually, the firm should save some money, since by bringing the verifier in every two or three years, for example, they can "bundle" the years together, and obtain a degree of economy of scale.

However, we don't recommend this, because:
  1. Falling out of compliance. It is very easy for firms to overlook something or make mistakes if they extend the period between verifications for too long. Asset management firms are dynamic, adding new strategies, changing old ones, adding new clients, experiencing staff and organizational changes, which can often impact the firm's GIPS compliance. In addition, the Standards are complex, and changes do occur, and so less frequent verifications increases the risk of becoming non-compliant.
  2. Marketing disadvantage. Recall that GIPS-compliant firms must now not only state whether they've been verified, but also, the period of their verification. Once you've gone beyond a year, your verification is seen by many as being "stale." Thus, you may have a bit of a credibility challenge with some prospects. Unfortunately, you may not even be aware that you're being overlooked because of a stale verification.
  3. What prospects expect. We have reason to believe that most prospective clients expect annual verifications. Since most firms get annual verifications, to do them less often isn't seen as a wise decision. Do the potential savings justify the risks? Recall that verification, like compliance itself, is an investment.
And so, what is the optimal frequency for verifications.

Well, just like Goldilocks, who found one bed to be too hard, one too soft, and one that was "just right,"
  • Quarterly is too often
  • Every two, three, or more years is too seldom
  • Annual is "just right."
Most of our verification clients get their verifications done annually. We believe this is the optimal frequency. The benefits of
  • Increased confidence the firm is remaining in compliance
  • Less disruption to the organization
  • The ability to avoid "stale" verifications
  • Which makes the firm more competitive
make this frequency ideal. We believe that prospective clients, too, expect to see annual.

If you have any questions, thoughts, or insights on this,  please share!


  1. Great post and helpful guidance. Also speaks loudly to your credibility as a verifier, since you are separating yourself from the commonly-held idea that "more frequent is better" even though this would be more profitable for you. Putting your clients' interests ahead of your own as you are doing here is the hallmark of a fiduciary and a trust adviser.

  2. Thanks for your post and kind remarks, Steve; much appreciated.

  3. I am in complete agreement with annual verifications. I have just gone through a bi-annual verification of my current Firm and the changes in the Standards completely caught them out. However, I have noted that some European Firms (to be broad enough) still do not really embrace the importance of be Verified. The practices are leave a sour taste in the mouth. As such, I wander what Frontier market firms' who would benefit greatly from being GIPS compliant's views would be given the attitudes of some European firms!

  4. Fully agree with you on this one. I have been asked to quote for quarterly verifications during tenders and have told the firms that this is not the best use of their money and time with little value added.
    Mabs Miah. EY.

  5. Mabs, glad that we agree. Funny: one of the verifiers we (you and I) know who does this is typically one or more quarters behind, which again raises the question: so what's the point?

  6. I think it's a bit early to be able to evaluate the response of "frontier" firms, but believe we'll see interest in verification, as they want to ensure they adhere to best practice.


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