The demand and appetite for model portfolios is rapidly increasing among investment advisors. A recent report released from Broadridge revealed that assets in model portfolios now stand at $2.7 trillion and are expected to double by 2023.
Some of the largest firms in the industry are assessing plans to host a model marketplace, provide models to existing platforms, or both. Morningstar launched a model marketplace in May 2019 and Fidelity announced in October that it is launching customized models on its own platform. Within these platforms, firms rely on third-party strategists to provide models that they then implement in their client accounts. The strategists may also be running these models in their own client’s portfolios or they may only be maintaining a hypothetical track record in a paper portfolio.
Recent SEC enforcement cases against strategists and platforms alike have resulted in many strategists being faced with increased scrutiny in terms of the necessary prerequisites to be accepted onto the platforms. The heightened risk stems from the platform’s desire to utilize the strategist’s historical track record, which could be based on a number of different methodologies (actual, live model, contemporaneous, back-tested, model linked to actual, etc.). In the past, there was often a mindset that the platforms were not responsible for the historical third-party performance and disclosure was effectively used as a liability waiver. The SEC has made it clear that if a firm wishes to utilize another firm’s performance, there must be enough due diligence to ensure that the calculations are accurate and that the disclosures fairly explain what the track record represents.
As a result, many platforms are requiring model providers to either claim compliance with the Global Investment Performance Standards (GIPS®), and be verified, or obtain an independent third-party audit of the models. Firms that are GIPS compliant and verified typically get through the due diligence process easily, but firms trying to get hypothetical track records on the platform will likely need some sort of independent certification. A certification provides the platform with the comfort needed to be able to market the performance by testing to ensure the track record is calculated as described. A platform can review the certification and quickly know if a track record represents live or model assets and, as a result, can ensure that relevant disclosures fairly reflect this. Without any certification, platforms would have to perform their own reviews to ensure they have a good understanding of what is being presented. This process often takes time and resources, neither of which are widely available.
How Can ACA Help?
ACA has been working with some of the industry’s largest platforms, model providers, and advisors to help address these challenges. If you are a platform looking for best practices regarding risk mitigation, or a model provider in need of assistance to ensure your products are accepted on the growing number of platforms on the market, ACA is standing by to assist you.
If you are looking for more information into this effort, please contact Christie Dillard at email@example.com.
ACA Performance Services’ Travis Morgan and Mike Sonnenburg discuss this recent trend and answer questions related to model performance on advisory platforms in the complimentary webcast “Model Delivery Trends: The Shift Towards Third-Party Certification.” This webcast is now available on demand.
About the Authors
Travis Morgan, CFA, CIPM, is a Managing Director with ACA Performance Services, a division of ACA Compliance Group. His primary responsibilities include overseeing GIPS compliance verifications and other performance-attestation engagements. His client base includes firms across the US. These vary across many different asset classes and types, which gives him diverse experience in helping companies of all shapes and sizes come into compliance. Prior to joining ACA in 2017, Travis served as a senior manager with Ashland Partners & Company LLP, where he had similar responsibilities.
Travis holds the Chartered Financial Analyst (CFA) designation. He also holds the Certificate in Investment Performance Measurement (CIPM) from the CFA Institute and has helped develop the CIPM curriculum by writing chapter-end questions. He is a member of the CFA Society of Los Angeles. Travis earned his Bachelor of Science degree in Business Administration with a focus on Accounting and his Certificate in Applied Finance and Economics from Southern Oregon University.
Mike Sonnenburg, CIPM is a Managing Director at ACA Performance Services, a division of ACA Compliance Group. Mike’s primary responsibilities are project management and staffing oversight for the 1000+ engagements within the ACA Performance Services division. In his 12-year history with ACA Performance Services, Mike has worked with a multitude of clients of varying sizes and complexities. In addition to his project management and staffing responsibilities, Mike is heavily involved with technology and IT Implementation across the division.
Mike graduated from the University of Tennessee, Knoxville with a B.S. in Business Management, and is also a member of the CFA Institute and the Chattanooga Society of Financial Analysts. In 2009, he received his CIPM designation. In 2011, Mike was chosen by the CFA Institute to serve on the CIPM Examination Review Panel.