The Spaulding Group has been at the forefront in providing education, information, and research, as well as fostering interaction regarding the high market index costs many firms and institutions are experiencing. We’ve moderated panel discussions, participated in and published a research study in The Journal of Performance Measurement®, addressed the topic in blog posts and our newsletter, and much more.
And occasionally, we’re asked for guidance. This post is a case in point.
A GIPS® client’s search for answers as to how to handle the high market index costs
I had a recent discussion with a GIPS verification client on this topic. One of their index providers has significantly increased their fees, and so, our client wants to make a change to another index provider going forward. They’ve found a comparable set of indexes to switch to.
The problem is that if our client continues to show the old index data in their GIPS presentations, they will have to continue to pay licensing costs to that provider, because they don’t “own” the data, they license it. This is something many asset managers and asset owners don’t understand: you pay tens of (if not hundreds of) thousands of dollars to use an index in your materials, thinking that since you’ve been paying this for years, surely you can continue to show it if you decide to stop paying. But, if you check your licensing agreement, you will no doubt discover that you cannot.
And so, what to do?
Switch your history, too!
If you claim GIPS compliance and you’re going to switch benchmarks, you are required to disclose the date of the change, along with the description of the change and the reason for it. As long as you’re changing to an index that will continue to properly represent the strategy, you’re fine.
To avoid paying not only for the new index, but for the privilege of showing the history for the old index, simply replace the history with data for the new index. Here’s a Q&A that touches on this:
And so, you can do this.
And explain the main reason WHY!
I would be quite candid: I’d explain that because of the high market index costs, you decided to find an alternative, that did essentially the same job, but at a lower cost. Why not?
Have some thoughts you wish to share on this? Please comment below!