I just got off the phone with a GIPS(R) (Global Investment Performance Standards) verification client, who is splitting away their institutional business from the trust side of their firm: a common step for banks and trust companies. They must decide on what an institutional account is.
First, there is no single, uniform definition: each firm must decide on what this means for them. They must document the definition and ensure that it’s applied consistently.
What might some of the criteria be for the definition? I suggest:
- The type of account: for example, endowments, foundations, and pension funds are typically thought of as “institutions.” Clearly some “high net worth” individuals can qualify as institutions, too.
- The size of the account: firms might establish an initial threshold to use to split away the “institutional” from the non-institutional. For example, perhaps $1 million or $5 million.
- The source of the business: many firms market their services through third-parties, who may offer their clients wrap fee or UMA (uniform managed account) products. In these cases, the third party provider can be viewed as an “institution,” even though the end client may be retail. These providers are, in a sense, a client, too, and often require managers to comply with GIPS.
Banks usually have “trust agreements” which make the trust accounts fairly easy to identify, though there may be accounts that still need to be split away. Defining criteria is an important and necessary step in this process of making sure the institutional accounts are properly segregated into the “GIPS firm.”