According to Reinhart: "At the cottage-industry stage, everybody does his own thing. But if you want to grow the business by 10 to 100 times as an industry, you need standard operating procedures and protocols." Currently, administrative inefficiencies and lack of product portability are the primary obstacles to exponential growth. And instead of trending toward a common protocol, efforts to foster differentiation in the marketplace are on the rise.
Erik Davidson says firms want to differentiate themselves by using platforms with unique managers and strategies, thereby offering unique value. Davidson, the co-founder of Carmel, Calif.-based Separate Account Solutions, is a separate account platform developer and does not feel a common protocol is near. "We're seeing firms move in the opposite direction," he says.
The report says the current system creates overlap and redundancies in every tier: front-end revenue-generating tools, supporting middleware/decision-making tools, and back-office tools. The paper calls for a more open platform for trading executions. Reinhart says trades should be pooled and executed at the firm with the best price. However, "the product's time has come," says Reinhart. "One of the points of writing the paper was to get people talking about [the need for standards]. Demand [for separate accounts] is starting to build-it's what wealthy individuals are looking for."
Evaluating Performance In Separate Accounts
By Paul A. Kuppinger
Evaluating the performance of separate accounts is not an easy task. The reason? Simply put, mutual fund performance is straightforward and easy to calculate, and the reporting is standardized, while separate account returns may vary significantly from account to account. Plus, there is no set regulatory body governing the creation of separate account composite performance.
As we know, the net asset value, or NAV, is the price to purchase or sell a share of the fund. To calculate performance for any given period, one simply has to divide the current NAV by the beginning NAV (adjusted for distributions). By comparison, since a separate account portfolio is managed on a fully discretionary basis for each individual investor or institution, various factors come into play, and performance will vary between individual separate accounts.
For example, the following elements can cause similar portfolios to have different returns:
Contributions to, or withdrawals from, the account
Discrepancies in start dates