I participated in the rewriting of the wrap fee (aka SMA (Separately Managed Account)) guidance, as a member of the then AIMR-PPS(R) Implementation Committee. This was the rewrite of the earlier rewrite, that was handled by a single (un-named) member of this committee, which resulted in a then record number of negative responses from the industry when it was put out for public comment. The committee was broken into two subcommittees, and I chaired one. The rules were loosened a bit, allowing, for example, wrap fee managers to look upon the wrap fee sponsors as their clients. We thought this made perfect sense.

Now, for the opinions which I’ve held for well over a decade.

Why, dear reader, must a wrap fee manager who claims compliance with GIPS(R) (Global Investment Performance Standards) be required to put their wrap fee accounts into a composite?

Some key points to consider:

1. It is my opinion (one that has been confirmed by more than a few wrap fee managers) that wrap fee sponsors rely primarily on the institutional composites to determine if they want to add the manager to their suite of managers
2. The manager’s “client” is the wrap fee sponsor. The individuals who do the investing are the clients of the sponsor. Okay, the manager signs up to be the discretionary manager, but rarely if ever actually meets with or speaks to the end client.
3. The wrap fee sponsors are not “GIPS compliant.” They are the ones who market their suite of managers to their clients, and use whatever performance materials they feel are appropriate (and that meet the requirements of the Securities & Exchange Commission (the SEC)). Yes, the manager is to encourage the sponsor to use their materials, but the sponsor is not required to.

It is quite a challenge, even given the revised guidance, for wrap fee managers to bring their wrap fee accounts into compliance and to maintain these records. The composites and presentations that are created serve little if any purpose.

My recommendation: Drop the requirement!

Make  it OPTIONAL for wrap fee managers to bring these accounts into compliance. If they feel that the composites have value, GREAT! But, in all likelihood, they will rely upon their institutional track record to be awarded the coveted role as a manager to be offered to a sponsor’s clients. If no institutional composite exists, or if it has become inactive, then I’d favor the requirement for a composite, but otherwise think it should be optional.

I would treat this the same as non-fee paying accounts. They are not required to be in composites, but can be included if the manager wants to. Likewise, the wrap accounts wouldn’t be required to be included in composites, but could be if the manager felt there was some value to do this. The verifier would be required to verify that the excluded accounts are, in fact, wrap fee, but beyond that, no additional work would be needed. Such a move would (a) save the manager lots and lots of time and expense to maintain these records and (b) save on their GIPS verification, as these wrap fee composites could be dropped.

Have a different view? Think this is silly, crazy, nonsense, or worse? Please chime in! I’m all ears.

My guess is that the GIPS Executive Committee (EC) is hard at work on GIPS 2015. Wouldn’t this be a great time to remove this rule?