As a CPA, your clients turn to you for all kinds of advice, one common area is likely how to find a quality financial advisor to help them manage their assets.
Clients and their CPAs need to start asking about investment reporting. Most people are playing catch up with retirement savings and don’t have the luxury of poor returns or large losses. Moreover, after 2008 we saw clients leave their advisors in droves due to oversize losses so, clearly, picking the right advisor is crucial.
Many advisors are great salespeople and will describe their firm’s abilities in meetings, but you should always ask for documentation. But as we all know, numbers can be manipulated, so how can you get numbers you can really rely on?
Enter GIPS, Every Investor’s Best Friend
Global Investment Performance Standards (GIPS) is a worldwide standard of reporting investment results created and maintained by the CFA Institute, an association responsible for the testing and credentialing of investment professionals worldwide. Advisory firms voluntarily choose to comply with the CFA Institute’s standard, GIPS, by doing the following:
Measure their own results in a very specific way
Have the results verified by an independent third party to ensure compliance
With GIPS, investors get the transparency they need to compare and assess investment managers. In other words, they get an ‘apples to apples’ comparison.
While many firms say they are dedicated to transparency, the vast majority of investment and financial advisors don’t comply with these standards. In fact, only about 1,600 firms worldwide claim GIPS compliance.
Many firms, will, however provide their own internal version of investment performance tracking. Unfortunately these can be made to look more favorable by cherry-picking certain times or data, or by not including investment expenses. These types of practices are not allowed by regulators, but of course that doesn’t mean they are never used.
Unless a firm complies with this industry-wide standard, you and your clients won’t have the information needed to assess a financial advisor’s performance. Of course, they may still be competent, but then again, they may not be as committed to transparency as you’d prefer.
Before you refer a client to a financial advisor, remember that getting an accurate accounting of an advisor’s past investment performance shouldn’t be optional. If an advisor won’t supply it, it may mean they don’t monitor their own results closely enough or they focus more on their bottom line than their clients’.
Until there’s a better way, GIPS is the best standard out there to allow you and your clients to make decisions based on facts, not sales promises.
John Odell, CFP® is CEO of Arroyo Investment Group, LLC, a fee-only financial planning and investment management firm based in Pasadena, California, but serving investors nationwide. As a GIPS®-compliant firm, we bring institutional quality, high performance investment management...