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!