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Holding SMAs up to Higher Standards

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.