The bout over performance reporting for separately managed accounts has reached a fever pitch.
A top-ranking official at the Money Management Institute, the trade association for the SMA business, fired a shot across the bow recently, arguing that the proposal put forth by the CFA Institute handcuffs investment managers and gives them little time to mobilize their resources. Wielding some rather fiery verbiage, the MMI warned the CFA Institute that it will fight tooth and nail if some concessions aren't made to ease the reporting requirements.
In a scathing letter to James Hollis, the CFA Institute's chairman of the Investment Performance Council, Janet Mariconti, chair of the MMI's CFA liaison committee, wrote that until the issues the trade group has raised are addressed, "MMI cannot and will not support, and will privately and publicly oppose, the CFA Institute's investment performance efforts."
Mariconti cited "drafting inconsistencies" in the CFA Institute proposal that, for one, impose "more burdensome requirements" on SMA managers than other investment firms.
The CFA Institute, formerly the Association for Investment Management and Research (AIMR), first introduced its wrap fee/SMA provisions and guidance for the GIPS standards back in 2002. However, the proposal has spurred controversy among MMI members because they believe it does not take into account the unique structure of managed accounts and the complex compliance issues associated with handling thousands of individual accounts.
"It should be changed to reflect the reality of the business," said MMI spokesman Chris Cosentino.
A portion of the debate centers on an IPC mandate that stipulates that an SMA unit can only be treated as a separate entity if it has "autonomy over the investment decision-making process." In short, managers seeking to claim compliance for their institutional business would have to ensure their SMA business meets the same compliance standards.
MMI, rather, is requesting that the IPC grant SMA managers an exemption that would enable them to claim compliance for their institutional businesses without having to do so for their SMA unit.
"[MMI is] trying to get flexibility and recognition of the differences in the business," said Matt Schott, senior analyst with research and consulting firm Tower Group of Needham, Mass.
Meeting Resistance
Under the CFA Institute standards, SMA managers would have to keep performance records for their accounts, a difficult task for many managers because maintaining those records requires obtaining the data from sponsors who are often reluctant to cooperate.
Given that reality, many managers are often forced to utilize "shadow accounting" to monitor investment performance, a costly effort in a business already being squeezed by thin profit margins. Managers in the SMA business attract smaller fees than those doled out on the institutional side of the business, making new compliance requirements a viable threat to their ability to turn a profit, regardless of whether they use shadow accounting or obtain records from the sponsor firms.
"The cost of shadow accounting is un-economical in light of the small fees investment firms are paid for managing wrap fee/SMA portfolios," Mariconti wrote in the letter.
Mariconti characterized the IPC's stance on recordkeeping as "draconian." She said it gives a wrap fee/SMA sponsor that refuses to provide access to performance records the right to determine whether an investment firm may claim compliance status under the performance presentation standards.
"A lot of the money managers are at a point where they're saying either we segue out of the managed account business or we only do business with those who do business with us on our terms," Schott said. "And that's not healthy for the industry [or] for the retail investor."
Further, the MMI argues that it needs more time for managers that are seeking compliance status for their SMA business or are forced to claim that status due to their financial inability to parse out SMAs as a separate unit of the company.
The CFA Institute plans to implement the new standards in January 2006, a date Mariconti calls "unreasonable" and indicative of the "continuing lack of understanding by the IPC of the complexity of the wrap fee/SMA business as it relates to performance."
Mariconti went on to say that the CFA Institute's justification for not delaying the effective date because it is tied to the adoption of Gold GIPS is "fallacious," arguing that other CFA Institute guidance statements have been delayed following responses offered during an industry comment period. MMI has requested that the effective date be delayed until at least 2008, and preferably 2010, similar to what the CFA Institute has done for cash flows and mandatory verification. Mariconti views the refusal to delay as yet another example of the IPC "treating SMA managers differently than other investment firms."
Despite the obvious discord between the MMI and the CFA Institute, there are several options available to SMA managers who are feeling squeezed by the proposed standards. The first option is to be non-compliant on the SMA business side. The rub there, though, is that a lot of money managers are concerned that if they go down that path, at some point, the CFA Institute will reevaluate that situation and decide that both divisions need to be compliant, Schott said.
Still Shadowing
Another option is to only do business with those sponsors who cooperate and guarantee, on some level, that they will make available records on a timely basis. Schott notes, however, that a firm would likely still have to do some shadow accounting. That would require building that capability in-house, hiring a third-party service provider to handle pieces of it or handing it over to a full-blown outsourcing provider that offers both the technology and business processing.
Registering the investment model with the sponsor is another alternative that is growing in popularity. In that scenario, the sponsor pays for the model and takes over responsibility for trading the accounts and all the other operational components. In return, managers get a reduced fee but also lower ongoing operational and trading costs.
"For advisors that are advertising their performance, we feel that our requirements are akin to the SEC's requirements under the '40 Act," said Alecia Licata, director, investment performance standards for CFA's Centre for Financial Market Integrity. She declined comment on their discussions with MMI, but said that the CFA is "not unsympathetic to the challenges" managers face and hopes to find some middle ground that is amenable to all parties involved.
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