CFA recommends Gross of Fees for Presentations?!?! management, marketing, presented, material, noticed

dcfox83

Hey all,

When I was looking at a family member's defined contribution plan from their employer. I noticed that the presentation material for the mutual fund offerings was EXTREMELY misleading. It was shameful at the level of horrid and misleading presentations by this large institution.

I raised my concern with the employer about the misleading marketing material. One of the areas of concern was that they presented the material "gross of fees" and made no mention of what the management fees were on the marketing material.

I was told that CFA institute recommends that presentations be done "gross of fees". I was shocked to hear this since I always remember "net of fees" as part of my studies when I was going through the exams.

There seem to be two sets of codes regarding fees - Asset Manager Code and GIPS. Asset Manager says to present both gross and net of fees and that the code is voluntary.

I've seen GIPS mention a recommendation of "Gross of fees" but have not found a clear text about whether the requirements to be compliant with GIPS are either "gross of fees" or "Net of fees". It seems odd to me to have two different codes (asset manager code and GIPS) on this by CFAI which contradict each other.

Can anyone give me a clear direction as to whether CFAI's GIPS compliance is based on the requirement of "net of fees" and a recommendation of "gross of fees" or is it some other variation.

The portfolios are mutual funds with the stocks forming the funds.

Thank you in advance,

Deep2002

cjs238

As far as I understand current recommendations in the Asset Manager Code of Professional Conduct (2nd edition, 2010) recommend in Appendix F.4.d: "At a minimum, Managers should provide clients with gross- and net-of-fees returns and disclose any unusual expenses." Generally the AMCPC requires fairly extensive disclosures, based on the principle of full and fair disclosure. This same principle is encouraged in the CFA Standards of Professional Conduct, and the use of GIPS is strongly encouraged.
GIPS (2010 edition) 4.A.5 and 4.A.6 state that firms claiming compliance with GIPS must disclose any other fees regardless of net or gross of fees returns are reported. Specifically in 4.A.5: "When presenting GROSS-OF-FEES returns, FIRMS MUST disclose if any other fees are deducted in addition to the TRADING EXPENSES."
However, there is a recommendation in GIPS 5.B.1 that does recommend gross-of-fee returns, but that does not reduce the disclosure requirement outlined in 4.A.5.
Usually, the CFA Standards of Professional Conduct recommend the use of the most strict law, regulation or standard. In this case disclosure of gross-of-fees plus any other fees charged to the investor. There is no issue from different standards, just use the stricter one.

I don't see anything in terms of CFA Institute recommendations that suggests to limit performance reporting exclusively to gross-of-fees returns.

From what I understand the firm you are looking at does not claim to adhere toe the AMCPC or to claim GIPS compliance. The person giving you the misleading information may at worst violate the CFA Standards of Professional Conduct III (D).

neil1234

Hi egal,

Thank you for your reply. I went through those and it does recommend gross and the requirement is to state whether it will be net or gross of fees. Which is ironic since net of fees is obviously more strict than gross so to recommend the less strict standard for the purpose of "fair portfolio comparisons" doesn't add up for me. It makes more sense to compare different portfolios AFTER fees to get the true return comparisons. The only logical explanation I could think of is that by making it Gross of fees as a recommendation, it makes it easier for firms to adopt it - though I would disagree that GIPS would still be the "highest standard of presentations"

The company's marketing material does not claim compliance with GIPS or AMC. All their marketing material has is a disclosure of (without any numbers on it for expenses):

"Disclosure Statement: The above data represents past performance and is not indicative of future results. Returns are calculated on a time-weighted basis.

The line of the graph represents the gross performance of the _______ fund while the shaded area shows the corresponding benchmark return. Where
applicable, the dotted graph line and shaded data in the returns table pertain to the underlying fund. Returns are calculated after fund operating expenses (such
as fund audit, custodial fees, interest charges and taxes) but before investment management fees. If you are a plan member, call _________, refer to your
enrolment material and/or the Web site at _______ for an explanation of the different types of investment funds and related risks."

When the employer inquired about their fund performance (compared to the benchmark), this is what was emailed to me:

"Regarding the presentation of fund returns prior to expenses when comparing to the benchmarks, I am informed that this is the recommended method of presentation by the CFA organization. Frankly, I agree with you that this provides an overly positive presentation of the results of individual funds, however it is the approved industry practice."

It upsets me because if this is indeed true - it reflects negatively on our designation in trying to look out for our clients' best interest when we actively promote GIPS and recommend the performance to be Gross of fees. If the information this person received is misleading, I rather correct this employer as to prevent a bad reputation on this designation of ours and perhaps teach the person spreading false information a lesson about making false misrepresentations.

Does GIPS require that the actual expenses of the additional fees be on the marketing material or just to mention that other fees can apply?

I just want to present a case to the employer that refutes this "cfa recommends gross" if I can tell this employer that even if CFA does recommend gross, the actual cost or expense of other fees like management fees have to be disclosed on the marketing material and not just mentioned it (like the disclosure statement above).

Any help on this is really appreciated. Hopefully I can do some positive change on this employers view of our designation.

Deep2002



Edited 1 time(s). Last edit at Sunday, August 28, 2011 at 01:07PM by deep2002.

ba736

If you want to compare gross of fees vs. the benchmark, by all means go ahead. As long as you disclose the other fees that would be taken from the fund like management fees. What I mean is if you disclose management fees of 2% per annum on that marketing material. If you only have to say "other fees like management fees will be taken from the funds", then to me, this is misleading because now your asking the client to hunt around for your information when the whole point of GIPS is to make it a simple, clear, and concise form of presentation.

This is the question I have is, whether you have to say what the actual fees are (ex. 2% management fees) in the marketing material or just disclosing that other fees are not including in the performance presentation (ex. "performance is before management fees" without disclosing what the actual cost of the fee is on the marketing material)

Deep2002

bdavi77962

I think I found it.

For anyone interested, like egal said, if you present gross of fees for your presentation, you have to disclose the fee schedule on the marketing material.

That I can agree with. Just mentioning other fees apply without providing any information on what the cost of those fees are would be deceiving.

So GIPS compliance would still be fairly presented if the fee schedule is mandatory (which seems to be the case)

Deep2002