After after-tax goes away ... what's a body to do?

You may have heard that the after-tax rules that are in the current version of the Global Investment Performance Standards (GIPS(R)) will be no more, as-of 1 January 2011. And so, what do you do if (a) your firm currently provides after-tax composites that conform to these rules or (b) in the future, you wish to provide after-tax returns?

The United States Investment Performance Committee (USIPC; the US country sponsor for GIPS) has developed guidance to assist you. Even though it's fairly brief, I'll summarize here.

First, the USIPC encourages U.S. firms to adopt (or continue to use) the rules as they exist today. We believe they represent the best way to portray your after-tax returns to prospects. The USIPC will be responsible for maintaining them going forward.

Second, after 1 January 2011, your after-tax composites will be supplemental, since GIPS will no longer have after-tax rules. Therefore, you will have to follow the supplemental guidance.

Third, you can adopt a different methodology to derive your after-tax returns (again, we recommend you stick with what is in GIPS today and what the USIPC will provide going forward), if you wish, as the USIPC cannot mandate their use. However, whether you use the USIPC (currently GIPS) rules or some other method, you should document it and be prepared to provide the details, if necessary.

And finally, if you are using the after-tax rules as they exist today, you cannot switch to another method until 1 January 2011, unless you fully adopt the rest of GIPS 2010 (see my earlier entries for further details).

Hope this helps!

Being fee conscious

In this weekend's Wall Street Journal, Jason Zweig discusses the importance of being conscious of fees. Our industry has worked towards encouraging managers to be more forthright regarding the impact of fees, but perhaps more is needed.

After-tax returns is an extension of this matter as it provides the investor with greater insight into what they're actually earning. Unfortunately, the after-tax standards first promulgated by the Association for Investment Management and Research (AIMR) and later included in the GIPS(r) standards, only to be scheduled for elimination in January 2011, didn't achieve the attention their developers expected: I think there was a "Field of Dreams" belief of "build it and they will come," but few did.

Investors, especially less sophisticated ones, need to get the full story about what they will end up earning, after fees and taxes are removed. More work is definitely needed here. Glad to see that Mr. Zweig is providing some much needed visibility to this topic.

After after-tax

The GIPS EC (Executive Committee) has proposed to eliminate after-tax standards from GIPS(R). This is understandable given that (a) there are two country-specific versions (the U.S. and Italy), (b) GIPS is a global standard and there is a desire not to have any country-specific rules, and (c) the prospect of having a generic version of after-tax that would apply to any country seems like a monumental challenge. That being said, I voiced opposition to the elimination of these rules because exceptions should be made. I expect, however, that these rules will disappear.

And so, this raises a question: what happens when they're gone? Managers of taxable accounts should ideally provide after-tax results to clients and prospects. What are they to do when there are no rules? No guidance has yet to be offered.

My recommendation: firms that wish to provide after-tax returns to clients and prospects should include a brief description of how they were arrived at and offer to provide more details upon request. Ideally, U.S. firms should use the rules that exist today. However, they will most likely be free to adopt whatever approach they wish. They should be consistent in their application of such rules and, again, provide information on their approach. I expect the EC will publish guidance as we move forward. I'll keep you posted.