Composites Insights Series

The trend on presenting net returns in marketing materials and technology's role in the process

The SEC Marketing Rule, adopted in late 2020 with a mandatory compliance date of November 4, 2022, significantly overhauled the marketing and advertising framework for SEC-registered investment advisers. One major part of the rule requires that an Advisor presenting gross performance must also present net performance “with at least equal prominence to, and in, a format designed to facilitate comparison with the gross performance, and calculated over the same time period and using the same type of return and methodology as the gross performance.”

The trends on presenting composite level net performance

During the second quarter of 2021, the United States Investment Performance Committee (USIPC), in conjunction with CFA Institute, conducted a survey of US firms claiming compliance with the Global Investment Performance Standards (GIPS^®) to learn about the methodologies and practices that firms are using to calculate and present net returns. The results of that survey in 2021 found that “…thirty-seven percent of survey respondents use actual fees for all composites, and an almost equal number (36%) use model fees for all composites. Twenty-two percent of survey respondents use actual fees or model fees, depending on the composite. A small number of respondents (4%) indicated that they do not calculate composite net returns.”

Now looking forward to 2024, in our recent September webinar, an interactive poll showed that 27% of respondents are using actual fees, 45% are using model fees or multiple model fees for all composites and 22% are using a mix of model and actual fees. 6% responded NA. Therefore, what we are seeing in today’s market is the expected evolution of net returns. There are firms still basing net returns on actual fees, but the trend is moving to model fees, and to an even greater extent, to presenting “multiple model fees”. Of the 45% of the market presenting model fees, 60% of that group have moved to show multiple model fees.

Watch this video clip from our webinar with panelists, Arin Stancil at Guardian, and Dena Hopkins, Confluence discussing this topic:

At the recent Annual GIPS Standards Conference, during the session devoted specifically to the SEC Marketing rule, there was a section on net returns, where the graphic below was shown:

Source: 28th Annual GIPS Standards Conference 2024, San Diego

The panel discussed the application of this presentation and stated that presenting multiple model fee examples was acceptable, as long as the highest fee was one of the models.

At Confluence, we firmly believe leveraging technology can empower GIPS^® Standards compliant firms to comply with the SEC Marketing Rule’s advertising performance requirements and especially the net of fees requirements.

Using the right technology can help firms achieve this. Our composites solution, Revolution Composites, provides firms with an unlimited number of return streams and allows net performance to be populated based on different fee schedules, which empowers firms to create the multiple model fee examples without any additional work. The solution sits within the best-in-class performance, risk and analytics Revolution platform as an optional module for easy integration. It provides user-friendly reporting to pull those performance streams and present them in the format desired with the proper disclosures and statistics.

Technology’s crucial role in compliance

As we stand at the crossroads of GIPS^® Standards compliant firms and the SEC Marketing Rule, the need for efficient, accurate and compliant reporting has never been more essential. By leveraging technology, firms can not only navigate the complexities of regulatory demands, but also pave the way for improved administration, streamlined processes and the seamless structuring of critical information.

There are many reasons to become GIPS^® Standards compliant, or to implement GIPS^® requirements as client demands and regulatory mandates amplify in the years ahead. GIPS^® compliant firms may be in a better position to meet the SEC Marketing Rule’s advertising performance requirements. To thrive in this shifting landscape, firms need to create meaningful composites that are essential in the fair presentation, consistency and comparability of performance over time and among firms.