This matter came up recently with one of our GIPS(R) (Global Investment Performance Standards) verification clients, and is worthy of some discussion.

What is a balanced account? I would say the characteristics are basically three:

1. It’s an account that invests in two or more different asset classes (e.g., stocks and bonds),
2. where the manager makes the investment decisions in all asset classes, and
3. where the manager makes the allocation decisions.

What if the client makes the allocation decisions which the manager follows? Then it’s not a balanced account. In these cases you have two or more different accounts (e.g., an equity account and a bond account).  Ideally, you would have them segregated on your portfolio accounting system so that you can place each in its respective composite.

Well, what if they cannot be separated, can we carve out the different parts and insert them into the appropriate composites? Yes, you can, as long as since January 1, 2010 you have managed the cash separately.

But what if we don’t manage the cash separately, what can we do? Well, in this case you could establish a rule in your GIPS discretion policy that states that in those cases where the client controls the allocation decisions, the accounts will be deemed non-discretionary. I don’t believe you have any other choices. Sorry.

Because many clients provide their managers with ranges to work within, the managers often treat them as balanced, since they have some discretion over the allocation. But if there is no flexibility, then the above applies.