GIPS was created by the Chartered Financial Analyst Institute and governed by GIPS Executive Committee. They are standardized guidelines for reporting the ability of an investment firm in order to make profits for investors. These principles were designed in such a way that potential investors could compare investment firms around the world.
GIPS were preceded by Association for Investment Management and Research Performance Standards (AIMR-PPS). GIPS conform to the global standards more than AIMR-PPS. This move to the global arena was induced to the increasing globalization of the world. Investment banks have clients throughout the world today. Thus there is a need of global standardization to have common investment standards and this is where GIPS comes into picture.
GIPS are standards, not laws. Thus the firms do not have to be GIPS compliant. And these standards are not codified into US securities Law. In spite of being voluntary, GIPS provide discipline and confidence in the company’s performance. Investment firms and investment managers should adopt GIPS as it is recognized worldwide for its credibility, integrity, scope and uniformity. This enables investors to directly compare firms with each others. It improves transparency by eliminating biases and data omissions. It is also an excellent way for internal risk control by investing significant time and resources and setting performance benchmarks for the firm.