As much as separately managed account managers want to comply with the Association of Investment Management Research's performance standards to strengthen their clients' trust, they are hampered by the strong controls that sponsor firms have over their retail SMA accounts.
Scott Sipple, managing director with AllianceBernstein and a member of the AIMR Liaison Committee of the Money Management Institute, says that even if sponsors were willing to share retail client information, they would most likely have to move their portfolio accounting systems to open architecture. And with the cost falling most heavily on sponsor firms, that would take a great deal of persuasion, Sipple says.
Nonetheless, he believes SMA firms and AIMR can find a compromise that is acceptable to sponsor firms. Sipple discusses here with Money Management Executive Editor Lee Barney the dilemma of having to rely on sponsor firms, and where the SMA industry goes from here.
MME: Why is it that separate account managers find it so much easier to report performance for their institutional clients than for their individual retail clients who are represented by sponsor firms?
Sipple: We do manage some money for individuals who come to us directly, not through a broker or a wrap program. That's a direct, private relationship, versus working with a broker at, say, Merrill Lynch, where customers access our services through consults.
MME: But don't sponsor firms represent most SMA investors?
Sipple: Yes, that's the preponderance of it. So, with regard to why it's easier for SMA managers to report performance for institutional clients, it really has much more to do with the issue of us being able to get information the way the sponsors want it prepared.
With institutional clients, we have the direct relationship with the institution. So all cash flows come through us, and we can track everything that is going on with that client account. When we are dealing with a client of, say, again using Merrill Lynch as an example, there are thousands more accounts, and it is very difficult for us to track the individual performance of each of those individual accounts. There's tremendous labor involved.
Number two, the sponsor firms have not asked us for those things, so we have not built it into our workflow. The sponsor firms are typically providing performance figures at the individual account level themselves.
MME: Why do the sponsors have such control of the custodial records and the portfolio accounting systems of separately managed accounts than they do of mutual funds?
Sipple: Number one, it's their clients. We are providing a service to the firm on behalf of those clients, but at the end of the day, it's their clients.
Number two, it has to do with how this industry developed. When this business got started, from the ground up, there really was no infrastructure at that time to handle the volume, so a lot of the sponsor firms built or found systems that worked for them. And then, as the money managers side of the business began to develop, firms such as our own found systems to link into those proprietary systems at the sponsor. So it allowed some of those vendors to sell products to the money manager community that were a lot cheaper than if they had to build them on their own.
You have to remember, when managed accounts got started, the sponsors were very large organizations with huge resources. And the managers were smaller-type, boutique firms without the same type of resources. So they were beholden to whatever the sponsors had deemed was the standard. And of course, each sponsor had different standards.
MME: How many standards would you say exist among the sponsor firms?
Sipple: Most of the bigger firms created their own platforms or used a vendor that was unique to them. Obviously, there are the five wirehouses, so all told, I would say there are probably 10 to 15 major platforms.
MME: Is the fact that the sponsors have as many as 15 disparate systems and money managers have their own systems, in turn, what is preventing the industry from readily moving to performance standards? What is the key issue here?
Sipple: I don't think the standards are necessarily the issue relative to AIMR. Yes, there is the question of seeing all of the detail in a client account. Is that a systems issue? Possibly, but again, some of the sponsor firms might not be willing to give all of that information because it doesn't make economical sense for them to push that information out to us in the first place. So why should they go to the additional expense of building such a system? We are not likely to get the full see-through, which the original AIMR proposal had asked for.
Also, marketing materials. They have asked us to maintain and keep records of all marketing materials. Again, a lot of those marketing materials we have no control over whatsoever. So, for us to keep records of those, we would have to go to the sponsor firms and ask them to provide records of everything they are sending to each client. That can be a very daunting task.
So, it's not just a systems issue. It's more of a logistics issue more than anything.
MME: So what is the Money Management Institute hoping to achieve at this point with regards to the various responsibilities of the sponsor and of the money manager?
Sipple: We had a very good discussion with them at our offices on July 22. While I can't say we collectively know what is going to be the resolution, we had a good interchange of issues and ideas, and AIMR is now in the process of discussing what they think is a proper solution. They, of course, have a broader set of constituents than sponsors and the separate account industry, so they are trying to reconcile the level of consistency that would apply to the separate account business to their global business. And it's not an easy task.
We accomplished what we were hoping for - communicating to AIMR the specific nuances of our business. They, in turn, shared some of the challenges they have had in trying to create more of a global and comprehensive set of policies and standards. Our hope is that we can find something for both AIMR's comprehensive needs and our own.
MME: If the information really resides with the sponsor firm, will it be up to them to create these standards rather than the money management firms?
Sipple: I don't think so because the sponsors don't claim AIMR-compliance, so from their perspective, it's really not an issue for them to battle. Their clients either don't want or need AIMR-verified numbers. It's the investment managers who have historically utilized and wanted to fulfill AIMR standards, whether it be managing institutional accounts or other accounts. We are the ones that are really feeling the whole weight of this issue.
MME: So then, the heart of the matter seems to be that the information resides at the sponsor firm, but they don't have the need to share this information with the money managers or to comply with AIMR standards. Therefore, if the sponsor firms are the key to the information but don't have the motivation to share it, how can this issue be resolved?
Sipple: I don't have the magic wand, and I don't think anybody in our meeting did, either. I think there are a number of very challenging and complex factors going into this mix.
We are looking for something that is workable. AIMR realizes they have to come up with standards that make sense for everyone, but what that solution is, it's very hard to guess at this point.
MME: One solution that has been suggested is for the money management firms to "shadow" the records of the sponsor firms. However, detractors say this is expensive and error-prone.
Sipple: It certainly is expensive. It is a task that we are undertaking here at AllianceBernstein - not for performance reasons, but to obtain greater detail on and better understanding of each of our clients so that we can produce more detailed internal reports on account activity. This way, our portfolio managers don't have to look at three or four or five different systems to make sure that everything is in proper balance, that cash balances in each account, for example, are at proper levels. It hurts us to go through that exercise on various sponsor systems. Now, by shadowing it, it should reduce that need.
Yet, it is an expensive task, not just on a systems basis, but there's also labor costs. So, effectively, we are doing redundant processing of the same account. It is expensive and will negatively impact margins. And, yes, there is the potential for errors, because it introduces another variable, so it doesn't necessarily solve the issue.
MME: Will the SMA industry have to move its portfolio accounting systems to open architecture, and if so, will the sponsor firms or the money managers shoulder most of this cost?
Sipple: If we go to open architecture, or some kind of centralized clearing platform, such as at the Depository Trust & Clearing Corp., which is the type of solution that the mutual fund industry has developed, the cost will be shouldered on both sides. But my suspicion is that the sponsors will shoulder a larger portion of that cost because they have the larger existing systems already in place.
So they have a lot of work ahead of them, and they are trying to establish what the benefit is to them.
MME: Do you suspect that firms will stick with their existing vendors or move to new systems altogether?
Sipple: I think it will be a combination of both. There will probably be an adaptation of existing players in the market, and this will also open the door for new players to come into the market. We are already seeing new players come into the market.
Some other large players are now at least entering into a space that was controlled by a small number of firms from other sectors of the investment management industry, as well as some brand-new players. With more firms entering the market, that will mean pretty significant pricing pressure.
MME: Do you think an open-architecture solution is the way to go?
Sipple: It appears to be a very good way for our industry to move forward. The issues are the logistics and the execution, however. Even though we may believe it is the best solution, it may not be executable. That remains to be seen.
Getting the commitment of this capital is challenging in an environment where budgets are constrained and profitability is a real serious issue for a lot of these firms.
MME: What is the timetable at this point going forward for the next steps?
Sipple: AIMR has said they would like to go back and internally discuss the information we presented to them, and also reconcile it with some of their other missions. After that, they will come back to us, but there aren't any timetables, really.
MME: Any other key points you would like to make in closing?
Sipple: Probably the most important thing that has come out of this, from both the MMI and AIMR perspective, is that this is being done on a pretty cooperative basis. They are interested in listening to our input and ideas, and we're open to listening to some of the issues they are trying to tackle, and it is somewhat of a joint effort.
We've been very pleased with the way the discussions have gone thus far. We hope that in this spirit, we can continue to work together to find a workable solution for an issue that we are all interested in solving.
Copyright 2003 Thomson Media Inc. All Rights Reserved.