Are Preliminary GIPS Disclosures a Good Idea?

    Author Archives: kmco

    Are Preliminary GIPS Disclosures a Good Idea?

    The Global Investment Performance Standards (GIPS) provide a voluntary framework for investment managers to use in presenting their investment performance. GIPS compliance has become increasingly important, particularly when dealing with institutional investors who often insist upon it.

    GIPS verifications test whether a firm has complied with the GIPS composite construction and policy/procedure requirements. It provides an opinion of compliance at a firm level, and does not ensure the accuracy of any specific composite. A deeper composite examination can be performed to provide an opinion on a specific composite.

    We live in a fast-paced society in which people want access to information quickly. This puts pressure on operations and performance professionals to provide investment returns shortly after a period end. There are multiple challenges in the process of compiling investment returns, including:

    • Reconciling client accounts
    • Making sure the securities are properly valued
    • Reviewing the accounting records to check that transactions are recorded properly
    • Updating investment performance presentations
    • Reviewing the presentations for compliance with GIPS and regulatory standards

    Performing these steps takes time. Suppose the process takes two weeks, but an investment manager wants to issue updated presentations within two days of the period end. Some investment managers, in their efforts to publish performance numbers, skip a few steps and modify their claim of compliance to indicate their returns are preliminary until the underlying data are reconciled. Such disclosures often look like the following:

    • “Preliminary data was used in calculating the current period’s performance”
    • “Returns are preliminary as underlying data are not yet reconciled”
    • “Preliminary data, if so noted, reflects unreconciled data”

    This raises the question of whether the practice of preliminary GIPS disclosures is permitted. A firm’s policies and procedures must be designed to calculate and present performance in compliance with the GIPS Standards. The GIPS Standards do not contain provisions allowing firms to conditionally claim compliance. Firms are permitted to use estimates; however, a firm would have to evaluate the final reconciled figures to the estimates.

    The GIPS Standards contain error correction provisions which would apply if the final figures are different than the estimates. For material errors, the firm would need to correct the returns, add disclosures about the correction to the presentation, and provide corrected copies to everyone who received a presentation with an error.

    As an extension of the concept of preliminary disclosures, some investment managers have modified their GIPS claim of compliance to indicate that their returns are preliminary until their firm’s verification (and potentially composite examination) is completed. Such disclosures often look like the following:

    • “Returns are preliminary until our firm-wide verification is completed by (add name of verifier here)”
    • “Performance returns are considered preliminary until examined according to GIPS for the reporting period”

    Although GIPS verification brings additional credibility to the claim of compliance, it is not part of the claim of compliance. Verifiers can act as resources (being mindful not to violate independence concerns), but investment firms have sole responsibility for their GIPS compliance. A firm’s policies and procedures must be designed to calculate and present performance in compliance with the GIPS Standards. The standards do not contain provisions allowing firms to conditionally claim compliance. The investment manager’s error correction policies apply here as well.

    Given that error correction can be a painful and tedious process, it may be prudent to wait until the period end closing process is completed before publishing updated performance presentations.

    We will be happy to provide further information relating to this subject. For more information, contact Thomas A. Peters, Director, Audit & Accounting at tpeters@kmco.com or 215.441.4600.

    Newsletter subscription

    Related content:

    Three Options If You Miss an FBAR Filing Requirement

    Over the last several years, the IRS has placed a high priority on stopping offshore tax cheating and bringing individuals back into the tax system. Ongoing efforts by the IRS, as well as the Department of Justice, have raised awareness of tax and information reporting requirements for non-U.S. investments.

    For instance, you are required to file an FBAR (Report of Foreign Bank and Financial Accounts) if you have a financial interest in, signature authority, or other authority over foreign financial accounts whose aggregate value exceeds $10,000 at any time during the calendar year.

    A foreign financial account is defined as a financial account located outside the U.S. and includes securities, brokerage, savings, demand, checking, deposit, time deposit, or other accounts maintained with a financial institution. It can also include a commodity futures or options account, an insurance policy or annuity policy with a cash value, or shares in a mutual fund or similar pooled fund. A debit card account is also treated as a financial account, as is a credit card account under certain circumstances.

    The FBAR is due by June 30 following the calendar year for which it applies. Thus, FBARS for the 2013 calendar year were due on or before June 30, 2014.

    If you or your client did not file an FBAR when it was required, you can take advantage of voluntary disclosure programs. Originally established in 2009, these programs are designed to encourage taxpayers to come forward and become current in their FBAR filings and to pay their tax liabilities. They have resulted in more than 45,000 voluntary disclosures from individuals who have paid over $6.5 billion in back taxes, interest, and penalties.

    The IRS offers three voluntary disclosure options:

    1. Offshore Voluntary Disclosure Program
    2. Streamlined Filing Compliance Procedures
    3. Delinquent FBAR submission procedures

    Offshore Voluntary Disclosure Program

    The Offshore Voluntary Disclosure Program (OVDP) is designed for taxpayers with exposure to potential criminal liability and/or substantial civil penalties due to a willful failure to report foreign financial assets and pay all tax due with respect to those assets. OVDP provides protection from criminal liability and terms for resolving civil tax and penalty obligations. In addition to the penalties that can be assessed on the tax on the unreported income, there will be an offshore penalty from 27.5 percent to 50 percent of the highest aggregate value of the foreign financial assets in the unreported accounts.

    Streamlined Filing Compliance Procedures

    Streamlined filing compliance procedures are available to taxpayers who certify that their failure to report foreign financial assets and pay all tax due in respect of those assets did not result from willful conduct on their part. They offer a streamlined procedure for filing amended or delinquent returns and terms for resolving tax and penalty obligations. Persons filing under these provisions are subject to an offshore penalty of 5 percent of the highest aggregate value of the foreign financial assets in the unreported accounts.

    Delinquent FBAR submission procedures

    Taxpayers who have not filed a required FBAR, are not under a civil examination or a criminal investigation by the IRS, and have not already been contacted by the IRS about the delinquent FBARs should file the delinquent FBARs and include a statement explaining why the FBARs are filed late. The IRS will not impose a penalty if you properly reported on your U.S. tax returns, and paid all tax on, the income from the foreign financial accounts reported on the delinquent FBARs.

    If you or a client has not filed required FBARs in the past, now is the time to come forward. Although the penalties are stiff under the OVDP program, they will be much worse if the IRS notifies you and they may include jail time. Please contact us to discuss the options that may be best suited for your circumstances.

    We will be happy to provide further information relating to this subject. For more information, contact Richard J. Nelson, Director, Tax Strategies at rnelson@kmco.com or 215.441.4600.

    Newsletter subscription

    The Keys to Effective Operational Due Diligence [presentation]

    Operational risk involves many qualitative elements such as an investment manager’s controls, design and implementation of systems, and oversight of employees. It is considered an uncompensated business risk because taking on additional risk of this nature is never expected to improve returns. Implementing a strong operational due diligence process creates an opportunity to strengthen internal systems and procedures and implement safeguards that preserve the investment mandate and minimize uncompensated risks.

    In this presentation from a recent industry conference, Thomas A. Peters reviewed the causes of investment mandate violations and increased risk as well as the objectives of operational due diligence. He also outlined the due diligence process and discussed samples of past findings in operational risk assessments.

    View the slides from the presentation.

    We will be happy to provide further information relating to this subject. For more information, contact Thomas A. Peters, Director, Audit & Accounting at tpeters@kmco.com or 215.441.4600.

    Newsletter subscription

    Related content:

    An Update to 408(b)(2) and Its Impact on Investment Advisors

    The Department of Labor (DOL) recently put forth a proposed amendment to its rule, Reasonable Contract or Arrangement Under Section 408(b)(2) – Fee Disclosure, which initially became effective July 1, 2012.

    Under the original rule, covered service providers were required to provide certain disclosures, some of which are described in the bullets below, to plan fiduciaries. Covered services providers are any providers of certain services described in the rule that expect to receive $1,000 or more in compensation. See our previous article for more information.

    In addition to carrying forward the disclosures required by the rule, the DOL’s proposed amendment would require covered service providers to include a “guide” to assist plan fiduciaries in their review of information. This guide would be required when disclosures are contained in multiple or lengthy documents. The definition of a lengthy document is currently open for interpretation and the DOL is seeking public comment on the specific number of pages for which this guide would be required.

    If a guide is required, a covered service provider must disclose the location, either with a specific page or some other general alternative, of where the following required descriptions are contained:

    • Services to be provided
    • All direct compensation
    • All indirect compensation
    • Any compensation that will be paid among related parties
    • Any compensation for termination of the contract or arrangement
    • All compensation for recordkeeping services
    • Any compensation, annual operating expenses, and ongoing expenses

    In addition to this information, the guide must identify a person or office, including contact information, which a plan fiduciary may use. Also, covered service providers must state whether they will provide services as a fiduciary, registered investment advisor, or both. The guide must be furnished as a separate document and changes to the information in the guide must be disclosed at least annually to plan fiduciaries.

    The amendment is open for public comment until June 10, 2014. Written comments may be submitted by using the Federal eRulemaking Portal at regulations.gov and following the instructions for submitting comments.

    The rule will not take effect until 12 months after publication of a final amendment. Based on the comment period end date, that should be sometime in 2015.

    We will be happy to provide further information relating to this subject. For more information, contact Craig B. Evans, Manager, Audit & Accounting and member of Kreischer Miller’s Investment Industry Group at cevans@kmco.com or 215.441.4600.

    Newsletter subscription

    Related Content:

    Kreischer Miller Exhibiting at PMAR XII

    The Journal of Performance Measurement’s Twelth Annual Performance Measurement, Attribution & Risk Conference PMAR XII

    May 21-22, 2014
    The Westin
    Philadelphia, PA

    Each year, the PMAR conference provides an opportunity for performance measurement professionals to learn about recent developments in performance, attribution, risk, and GIPS, as well as network with peers and gain new insights and solutions.

    Kreischer Miller will once again be exhibiting at this year’s PMAR Conference.  Stop by and see us!

    More details about PMAR XII.

     

    Kreischer Miller Exhibiting at ICI General Membership Meeting

    Investment Company Institute
    2014 General Membership Meeting

    May 20-22, 2014
    Washington Hilton
    Washington, DC

    Sponsored by the Investment Company Institute, the General Membership Meeting provides a forum for industry executives to discuss key issues, feature industry leaders, and welcome international investment colleagues.  Service providers and the press are important parts of each event.

    Kreischer Miller will once again be exhibiting at this year’s ICI General Membership Meeting.  Stop by and see us!

    More details about the ICI General Membership Meeting.

    Large Financial Advisory Firm Searches for Audit and Tax Partner to Go Beyond Basic Compliance

    The Client

    The Firm originated as a provider of financial advisory and investment management services to primarily state and local governments and non-profit institutions. Today, the Firm is a national group of companies consisting of financial advisory firms, asset managers, and a broker-dealer, providing a broad array of products and services.

    The Opportunity

    Several years ago, this $72 million growth-oriented firm was looking to maintain their progression and hone their ability to quickly adapt and respond to changing market opportunities and challenges. The Firm was seeking a new audit and tax compliance partner that could go beyond just providing a basic audit opinion and tax returns. They wanted a partner that could respond quickly to the unique needs of their growth-oriented company and add value as they went through various growth phases, forms of business enterprises, and ownership changes.

    The Solution

    The Firm was initially referred to Kreischer Miller by their industry contacts. They were impressed by Kreischer Miller’s commitment to understanding their business and providing proactive advice and counsel. The Firm decided to engage Kreischer Miller, which was the start of a long-term audit and tax compliance partnership.

    Far beyond meeting all of the Firm’s bank, regulatory, and tax filing deadlines, we demonstrated our commitment to being a long-term partner in areas such as:

    • IRS examination assistance: We assisted management in guiding IRS examiners through the Firm’s accounting complexities, which resulted in minimal adjustments.
    • Tax notices and estimates: By providing ongoing tax advice, consultation, and assistance with quarterly income tax estimates and resolution of tax notices, we kept disruptions to the Firm’s team to a minimum.
    • Financial statement wants vs. needs: Although the Firm wanted separate entity audits, we recognized they were no longer needed and advised them to switch to a single consolidated audit. This led to significant cost savings for the Firm.
    • Education: We helped the Firm navigate and implement changes in the broker-dealer reporting rules, including the agreed upon procedures required by the Securities Investor Protection Corporation (SIPC) and other internal control and exemption reporting requirements.
    • Control recommendations: We provided recommendations to strengthen policies and procedures in areas such as cash disbursements, cash receipts, fixed assets, general ledger entries, and operations matters, including project level time detail, employee timesheets, and client engagement letters.
    • GIPS: We educated the Firm’s asset management team in understanding the Global Investment Performance Standards (GIPS), its impact on institutional investors, and how GIPS compliance could impact the Firm and their ability to generate revenues.

    The Outcome

    Over ten years later, the Firm remains a Kreischer Miller client. Throughout the relationship, the Firm experienced minimal turnover with Kreischer Miller’s audit and tax team. This not only saved the Firm from the burden of having to continually train new staff, but it allowed Kreischer Miller to provide proactive advice and guidance, thanks to our deep institutional knowledge of the Firm.

    Since the beginning of our relationship, the Firm has grown to more than $120 million with offices in more than 25 states, and they are continually seeking more growth. While the Firm’s success sits squarely on their shoulders, Kreischer Miller has made a difference. Our role has gone far beyond merely fulfilling the Firm’s compliance needs. We have served as an advisor and continue to add value as part of our services.

    Wealth Manager Needs Firmwide Investment Reporting Model and Package to Grow AUM

    The Client

    The Wealth Manager is a privately-owned firm that provides investment management, manager selection and monitoring, asset allocation, and other financial services. The Wealth Manager also provides advice to financial institutions and families around alternative investments.

    The Opportunity

    In order to take the firm to the next level, the Wealth Manager knew they had to put significant effort into marketing their investment returns. Because the Wealth Manager had historically focused on providing services that were customized to the needs of each investor, they had not previously looked at returns across strategies firmwide.

    The Solution

    The Wealth Manager decided to seek out a solution that would allow them to more proactively market their investment performance to attract new clients and grow assets under management. The firm reached out to their investment industry contacts, who in turn referred them to Kreischer Miller. Based on our experience with other clients facing a similar dilemma, our proposed solution was to conduct an initial assessment of key issues and future goals and then create a customized reporting package, so that only minor tweaks would be needed on an ongoing basis.

    During the initial assessment, our highly experienced directors and managers worked to gain a thorough understanding of the Wealth Manager’s documentation, current goals, and future objectives. We then met with the firm to outline our assessment of their reporting needs:

    • Strategies covered and the ability to carve-up and/or combine multiple strategies
    • Time period covered and the ability to take snapshots of any timeframe
    • Manager selection and the ability to view individual managers or an aggregate across managers
    • Additional criteria, such as taxable vs. nontaxable and the ability to expand criteria
    • Easy transferability to a clean and organized reporting template
    • The ability to reconcile

    This initial assessment provided the Wealth Manager with immediate feedback about areas that needed greater focus in order to achieve their goals. More importantly, the process provided insight into what other advisors were doing and opened their minds to avenues that were not initially contemplated at the start of the project.

    As the firm continued to gather information and hone their goals and objectives, we served as a resource and helped guide them through the process. Many of the Wealth Manager’s final objectives were tightened and additional objectives were added to save time going forward.

    After the initial assessment was complete, we began the creation of the model and reporting package. Constant communication between the Wealth Manager and Kreischer Miller throughout the process  led to further enhancements and checks and balances. After providing the Wealth Manager with on-site training and instruction manuals, the firm was able to take over the ongoing maintenance of the model and reporting package.

    The Outcome

    As a result of the engagement, the Wealth Manager now has a clean, organized report package to assist in achieving their primary goal – growing assets under management. Working with Kreischer Miller also helped the firm identify and achieve two important additional goals: a new way to review past performance and a flexible model that would grow with them.

    Investment Fees: Are You Charging the Right Amount?

    In today’s marketplace, investment management fees vary widely from one product to another, as well as from one client to another. Fee calculations range from simple to quite complex.

    In their most basic form, management fees are a flat percentage of assets under management. However, investment advisors and clients can often better meet their objectives using more advanced fee structures. To reward clients who entrust them with larger asset amounts, investment advisors often use tiered rate schedules that offer lower fee percentages as the amount of assets under management increase.

    Tiered rate schedules are just the tip of the iceberg, as there are many other factors which may impact fee calculations:

    • Performance fees
    • Investment allocations
    • Waterfall calculations
    • Differing schedules for different clients
    • Aggregation of multiple related accounts for use in a unified tier schedule
    • Rebates for investment in multiple firm funds (some of which may be invested in other firm funds)
    • Most favored nation clauses (where an investment advisor is required to make sure that the client with the clause always gets the lowest fee charged to any of the investment advisor’s clients)
    • Alternate calculations when client contribution and withdrawals occur

    Unfortunately, most mainstream accounting and billing systems are unable to cope with the variety and complexity of an investment manager’s varied fee calculations. Many investment managers utilize spreadsheets, internally developed databases, or one of a few specially designed (and costly) software packages in the marketplace.

    Here are some common calculation errors:

    • Using an outdated fee schedule
    • Using the incorrect tier
    • Not calculating performance fees in addition to base fees
    • Missing or misapplying hurdle, claw back, and high water mark provisions
    • Using the incorrect period for performance calculations
    • Not aggregating all accounts for grouped tier calculations
    • Not handling client inflows and outflows according to contractual terms

    It can be embarrassing for a manager if a client discovers they  were charged too much. On the other side of the coin, investment advisors generally do not like to undercharge, leaving money on the table.

    In addition to carefully considering which systems to utilize, managers should perform procedures to test the accuracy of revenue calculations on a periodic basis. Investment advisors can do this internally or hire a firm to assist in the process.

    One approach is to sample the fees. For the sample accounts selected, the recalculation process generally involves:

    • Obtaining the most current fee schedule
    • Obtaining custodial records to support market values
    • Carefully reading the fee calculation terms as well as any related contractual provisions that might impact fee calculations
    • Recalculating the fee

    For many types of asset classes and clients, this is a relatively straightforward process.  For alternative investment funds, allocation and waterfall calculations generally need to be calculated from the inception of each fund.

    If a manager were to make recalculations once or twice per year, the sample could be rotated so that over a period of time (such as 3 to 4 years), the process would cover most of the accounts. We recommend starting with the most complex accounts that have the greatest probability of errors.

    If errors are found, investment advisors should implement processes and controls to minimize future miscalculations. Investment advisors can also inform their clients that their own systems of controls caught the error, a far better alternative to a client discovering an error that has completely escaped detection by the investment advisor.

    The fee calculation process is varied and complex. Take the time and effort to do it right. It is essential to ensuring you are not leaving money on the table…or upsetting clients unnecessarily.

    We will be happy to provide further information relating to this subject. For more information, contact Thomas A. Peters, Director, Audit & Accounting and member of Kreischer Miller’s Investment Industry Group at tpeters@kmco.com or 215.441.4600.

    Newsletter subscription

    Related Content:

    Annual Investment Industry Update

    Thursday, December 5, 2013
    12:00pm to 3:30pm
    DoubleTree Suites
    Plymouth Meeting, PA

    Staying on top of the myriad of changes that impact an investment advisor’s operations can be a challenging task. This seminar will provide you with an overview of current topics and key changes impacting performance reporting, SEC compliance, and accounting & tax issues.

    Join us for a robust agenda of timely topics:

    GIPS Update

    • Newly-issued papers providing guidance for Policies & Procedures and Advertising
    • Impact of new Q&As issued in 2013
    • Overview of Guidance Statements and Working Group projects in process

    SEC/Regulatory Update

    • SEC Enforcement’s aggressive agenda, including auditors and directors
    • Actions against compliance officers and programs
    • Recent best execution cases
    • Hedge and private equity developments, including the JOBS Act

    Tax Update

    • New tax rules for investment income
    • FACTA update
    • Additional recent changes, including the impact of DOMA and the Health Care Act

    Audit & Accounting Update

    • Proposed changes to the auditor model
    • New rules for broker/dealers
    • Key accounting updates impacting investment funds

    Presented by Kreischer Miller and Cipperman & Company.

    Agenda:

    12:00pm – 12:45pm    Lunch and networking
    12:45pm – 3:30pm      Seminar

    Newsletter Signup

    Kreischer Miller

    100 Witmer Road,
    Suite 350
    Horsham, PA 19044
    215-441-4600

    Services

    About Us

    Resource Center

    Career Opportunities

    © Copyright 2024 Kreischer Miller IIG
    miller-designworks-logoWebsite Design & Development by