Why Can’t I Speak Directly to my Advisor about Investment Performance? (Part 3)

Today I conclude discussion about why some investment advisers like First Ascent and Envestnet will not speak directly to the retail clients they ultimately serve.

Picking up where I left off, I responded to Sean Gillian of Longs Peak Advisory Services:

     > Would CCO [Chief Compliance Officer] apprehension about
     > performance reporting, which may lead to problems with the
     > SEC if not done properly, be mitigated if IAs were willing to
     > undertake the expense of becoming GIPS complaint and verified?

Gilligan responded:

     > Some CCOs don’t want to be GIPS compliant… [and verified]…
     > because they consider that a risk. False claims of compliance
     > are a risk so they worry about taking on the additional
     > burden of making sure they are complying with something they
     > are not otherwise required to do. In reality the SEC likes
     > GIPS, but they do take the claim very seriously to make sure
     > you truly are compliant if you say you are.

I am reminded of a financial advisor perspective suggesting greater liability for publishing inferential statistics where I wrote:

     > Advisers should not publish statistical analysis because they
     > may overstate importance to the uneducated reader? In my
     > opinion, statistical analysis is necessary to suggest a
     > difference might be meaningful. And only the author can do
     > the statistical analysis since the entire data set is rarely
     > (if ever) presented in the article itself.

Backing claims with statistics is the right thing to do because empty claims are potentially contaminated with underlying motives of sales and marketing teams. Similarly, I believe [GIPS compliant and verified] performance reporting is the right thing to do for anyone investing money for others. In both cases, doing the right thing seems to be the risky alternative.

Are regulations to blame for this non sequitur? I asked Gilligan:

     > Is it a matter of their compliance department (or firm) not
     > having a full understanding of the regulations, which makes
     > them recommend erring on the side of caution?

He said:

     > It is… compliance wanting to keep their job simple.

I asked:

     > Why are portfolio managers [PM] okay with this? Do they
     > realize compliance directs them to operate in this way out
     > of a desire to “keep their job simple?”

Gilligan responded:

     > I wouldn’t say that PMs are okay with this. Many firms have
     > an ongoing debate between PMs/Marketing and their compliance
     > department regarding… [advertisement of performance]. Larger
     > firms form working groups with representatives from both sides
     > that work to determine a compromise that everyone can live
     > with and that becomes their firm policy.
     >
     > I agree with you that GIPS compliance is best practice and
     > there should be transparency, but unfortunately it gets more
     > complicated when compliance people are overly scared of
     > regulators finding deficiencies in what they do.

He also pointed out that GIPS compliance is separate from general regulatory compliance (e.g. SEC or state registration), which makes me wonder what compliance members get scared. I would not think a firm like Longs Peak gets scared of regulators finding deficiencies. Longs Peak has experience and specializes in GIPS compliance. If they have doubts about whether they can do their job properly then I certainly would not want to hire them!

Unanswered questions remain but compliance and regulations seem to be complicating matters about the right thing to do.