Fund managers are starting to worry that proposed regulations on both sides of the Atlantic could increase the potential for errors in the fees they should earn for managing separately managed and other accounts because of the manually-intensive process used to calculate the fees.

So says a survey of about 50 fund managers with assets of between $100 billion to $1 trillion conducted by Bonaire Software Solutions LLC. The Boston-based firm offers a revenue management software product called Revport which calculates fund manager fees, rebates to investment funds, retrocessions and trailer commissions for distributors.

Three-fifths of the fund managers responding to Bonaire's survey said that the additional regulatory requirements could mean fee leakage – the fund manager would be underpaid or overpaid in fees by the sponsor or distributor of the separately managed account.  Ninety-two percent of the fund managers also said that they must manage about 200 different fee schedules with the multitude of sponsors they use.


Just how big is the problem? The last study on the issue in the managed accounts industry, conducted in 2008 by Needham, Mass.-based research firm Tower Group, showed that as much as 1.7 percent of gross fees can leak out, in either direction.

That comes to between $241 million and $306 million in either overpayments or underpayments annually. That fee leakage ultimately translates into revenue leakage.

“Regulation such as Dodd-Frank in the US and Retail Distribution Review in the U.K. is requiring fund managers and sponsors to provide a higher degree of fee transparency,” says John Bosley, chief operating officer for Bonaire.

That transparency in the United States would, if adopted by the Securities and Exchange Commission, mean that the  fund manager and the sponsor -- or distributor such as a broker dealer --  explain the methodology and data used to calculate the fees earned to each other as well to the ultimate client – the investment fund or high net-worth individual.

In the U.K., the Financial Services Authority last year came up with three guidelines, in their Retail Distribution Review (RDR) report, which advisors for retail investors must follow by the end of 2012. Those are: improve the clarity of describing services to customers; disclose financial renumeration; and increase professional standards.

Sponsors of separately managed accounts do provide investment managers with a high-level analysis of just how they calculated their share of fees from the accounts. At best, the calculations are done electronically but they are sometimes done through Excel spreadsheets.

In addition, the granular details on the account level can get delivered in emails or faxes. It could then take two or three dedicated employees of the fund management firm several days or weeks to discover if the sponsor made any fee billing mistakes before they can even be corrected.

And without an understanding of how the sponsor came up with its figure, the fund manager can only hope the sponsor is right; the sponsor also has no way to determine if it is overpaying the fund manager.


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