GIPS Users To Start Disclosing Fees With Returns

According to a news release, the board of governors of the Association for Investment Management and Research (AIMR) – GIPS’ worldwide sponsor – approved the fee disclosure rule to take effect January 1, 2005. However, AIMR called for GIPS users to switch over sooner if possible.

The new GIPS fee provisions standardize the calculation and presentation of the impact of fees on investment returns. The consistent treatment of fees allows for greater comparability of returns and increased transparency to investors, the AIMR statement said.

The fee policy claims that the best point of comparison for all investors is the gross-of-fees return less the investment management fee that the prospective client expects to pay. Consequently, the new fee provisions recommend that firms show gross-of-fees performance results but require them to disclose in each presentation the fee schedule that is appropriate to the presentation, that is, appropriate to both the product being sold and the type of prospective client being shown the results.

All returns (both gross and net) must be calculated after the deduction of the actual trading expenses incurred during the period, the GIPS changes require.

The new GIPS standard also includes:

• If a firm includes a bundled fee portfolio in a composite, it must disclose that fact as well as state the various types of fees that are included in the bundled fee.
• In situations where firms invest a portion of a larger portfolio in a pooled fund, utilize a sub-advisor or create a fund-of-funds structure, it is most appropriate to present the return net of all fees since all investors must pay these fees.
• If a composite contains non-fee-paying portfolios, the firm must disclose that fact as well as the percentage of the composite assets represented by the non-fee-paying portfolios.

GIPS provides a standardized approach, based on the principles of fair representation and full disclosure, for firms to calculate and report their investment returns, allowing investors to compare results from GIPS-compliant firms throughout the world, the AIMR statement said. The GIPS standards are followed by firms in more than 30 countries.

For more information, go to www.aimr.org/standards/pps/gips.html .