Advisers See Value in Performance Reporting

Market returns are still heading south, and the blind faith that investors used to have in their investment managers has disappeared. Today's investors, both retail and institutional, are taking a greater interest in how their money is being invested and who is accountable for it.

To meet this need, firms are seeking out technologies to assist them in becoming more transparent to their clients, while increasing customer retention with a greater level of servicing. Some firms are investing in reporting technologies to give them a competitive edge and added-value that makes a difference in driving business.

MELLON ADVISORS
Mellon Advisors, a division of the Dreyfus Retail Group that manages high-net-worth clients with over $100,000 in assets, recently decided to provide increased customer service and greater transparency using performance-measurement and attribution reporting. Performance measurement allows the investor and adviser to see both historical rates of return as well as a fund's performance relative to its peers using industry-wide or customized benchmarks. With this information, firms can determine and demonstrate why an investment produced a certain outcome and how to make corrections to improve its return.

While Mellon Advisors had never used a reporting function other than beginning- and end-of-the-month statements for clients, which didn't list much more than a client's balance, Walter Kress, president of the division, says he believed that there were benefits to be gained from a more in-depth reporting system that could drill down on each investment and make comparisons to others investments.

After being approached by performance-reporting vendor Investment Scorecard almost three years back, Kress began exploring the concept of providing clients with over $300,000 in assets and their advisers with a better understanding of how their investment portfolios were doing.

"I felt that it was very important for our most valued clients to know what is going on in their portfolio, whether the market is up or down," Kress explains, noting that Dreyfus has always prided itself on its close client relationships.

Kress reviewed other products on the market, declining to name them, but says that Investment Scorecard offers key components for addressing his firm's retail clientele and providing timely "cusip-up" detailed performance reporting, which allows an investor to observe each investment's impact instead of a general overview of the portfolio. In addition, the vendor offers AIMR compliance which means Dreyfus is inline with industry-reporting standards.

"Clients understand that they may have lost money in this recent market environment, but being able to see how their investments measure against benchmarks, especially drilled down to individual securities, helps to put it in perspective," says Kress. "You can look at a particular security and find out if it is helping to create or to destroy wealth by putting it up against a benchmark."

After a nine-month implementation period that included Beta testing, Mellon Advisors went live with Investment Scorecard, enabling the firm to provide customers with monthly co-branded online reports hosted on Investment Scorecard's Web site and quarterly paper-based or CD Rom reports.

Reception for the reporting was lukewarm at first, Kress says, but he eventually saw enthusiasm in the form of additional Dreyfus investments.

"The measure of net flow in accounts of Scorecard clients was appreciatively better than clients who did not have Scorecard," he explains. "In addition, there were clients that were below the threshold of receiving Scorecards, and upon receiving communication about the offering, they did commit additional dollars to bring their accounts up to a level where they can now enjoy Scorecards."

Kress had the added-value of being able to see reports on managerial levels which allows his advisers to see groupings of their investors' portfolios, as well as for him to observe his advisers.

"Investment-management firms are using performance-measurement reporting to look at what their portfolio managers are doing," says Gavin Little-Gill, senior analyst with Massachusetts-based TowerGroup. "They are trying to understand to what extent the performance that occurred was just luck and to what extent it was truly skill."

Despite Mellon Advisors' success with Investment Scorecard, even the vendor's Chief Executive Officer Joe Maxwell concedes that the solution is not for everyone.

"You get your few firms that ask us for an in-house model, but we truly believe that performance reporting should not be done in-house," he explains, stressing the independence and integrity of a third-party system.

Firms looking for an in-house solution may turn to performance-reporting vendors such as Dallas-based First Rate Investment Systems, which provides the option of outsourcing or bringing an in-house platform to firms, while many vendors such as Advent Software or Thomson Financial offer performance reporting as part of an integrated portfolio-accounting solution.

MERRILL LYNCH PRIME BROKERAGE
Retail wealth managers are not the only financial-services firms turning to technology to obtain better reporting capabilities. As alternative investing becomes more mainstream, hedge funds are popping up all over the world, and they are looking for prime brokers to assist them with their technology needs.

Many hedge funds turn to prime brokerages to outsource their technology processes, as in-house operation would be costly and inefficient for small- or mid-tier firms. Along with technology assistance, hedge funds can also obtain post-execution help from prime-brokerage partners, including clearing, financing, securities lending and portfolio accounting.

Merrill Lynch Prime Brokerage services a wide variety of hedge funds, but recently made the decision to focus on reporting technology for midtier funds with between $500 to $700 million in assets that employ domestic, international and combination investing strategies.

Ajit Naidu, first vice president and chief technology officer in Global Equity Financing & Enterprise Data Services at Merrill Lynch Prime Brokerage, explains that reporting technology could expand Merrill's presence in the $3 billion prime-brokerage market.

Naidu says that Merrill had the benefit of seeing what other prime brokers had done before it. "Coming late to the party has some advantages. We can leverage the experiences of existing prime brokers to see what did and did not work for them."

Instead of taking the route of many of their competitors, who use in-house reporting systems, Naidu says that Merrill believed a vendor solution would allow fast implementation and leverage the proven functionality of tools on the market.

The firm created a joint solution, using two products: Advent Software's Geneva portfolio-accounting system and Eagle Investment Systems' Pace data warehouse, Internet portal and reporting system.

Maria Banke, director and head of Global Prime Brokerage Technology with Merrill Lynch Prime Brokerage, says the process begins with Merrill receiving the trades throughout the day in file formats or through Pace's Internet portal. The trades are moved through Pace's database into Geneva to calculate, then fed back into the Pace database to create, as well as store, reports. Those files are then sent back to hedge-fund managers, via Merrill-hosted Internet portals, the following morning.

Since it was the first time that Geneva and Pace had worked together, Merrill had to integrate the systems, says Banke. Advent says that it has since created a connection.

The reports provide details such as trade-day activity, cash activity, evaluation, forecasting and investment gains and losses per asset type, Banke says. In addition, she says, different reports can be produced for different hedge-fund employees, depending on their level of entitlement.

Banke says that reporting also serves as a customer-servicing tool for Merrill's hedge-fund clients. "We're able to let hedge funds pick and chose what reports they'd like to receive on a daily, monthly and quarterly basis, and at various levels of consolidation," she explains.

Despite evidence that some firms are making reporting a priority, TowerGroup's Little-Gill points out that there are other areas where firms may spend their depleted technology budgets. "The demand for true performance attribution has to come from the investors," he says. "Some sort of performance analysis needs to take place, but does it need to happen on a transaction-by-transaction basis? I don't know that that is the case."