Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Global Investment Performance Standards (GIPS)

What it is:

Global Investment Performance Standards (GIPS) are ethical standards for asset-management companies. They were established by the Association for Investment Management Research.

How it works (Example):

The CFA Institute, formerly known as the Association for Investment Management Research, established GIPS for disclosing assets under management (AUM) and related information. AUM refers to the total market value of investments managed by a mutual fund, money management, hedge fund, portfolio management or financial services company.

AUM generally changes according to the flow of money in and out of the fund and according to changes in the value of the fund's underlying investments. GIPS require management companies to, among other things, include discretionary and nondiscretionary portfolios as well as investments controlled by a third party on behalf of the asset management company in the AUM calculation.

Why it Matters:

GIPS provide a uniform method of disclosure about the performance of assets under an advisor's management. The Securities and Exchange Commission also has rules for disclosure of investment performance.

The idea is that the investor is entitled to fair and transparent disclosure about an asset manager's true performance over time. Because many asset management companies compare the size of their AUM with competitors as a measure of success, accurate disclosure is especially important for accurately evaluating the returns earned by an asset manager and its competitors.

Additionally, many asset management companies charge management fees equal to a fixed percentage of AUM. This arrangement motivates the asset management company to maximize AUM, which further supports the need for uniform, ethical standards.