The Institute for International Research recently held its 10th annual forum on performance measurement. One of the sessions was an expert roundtable on the merits of verifying compliance with performance presentation standards of the Association for Investment Management and Research. There was extensive and lively audience participation.
The three conclusions of this discussion were:
* Clients don't care about AIMR compliance;
* Some consultants may care enough to ask, but compliance doesn't seem to matter much in getting hired; and
* The Securities and Exchange Commission is concerned about fraudulent claims of compliance.
If these are accurate observations, then investment managers should not claim compliance even if they are compliant.
Let's examine why.
Incentives modify behavior and come in two forms: carrots and sticks. In the case of AIMR compliance, the carrot is client preference and the stick is SEC disciplinary action. We concluded at the roundtable that there is no carrot, so all that matters is the stick, which can be avoided by not claiming compliance, even if you are compliant.
It's that simple. But that's not right, you say. There is the moral incentive that says you should play by the rules even if the rewards aren't immediately apparent. Perhaps someday the clients will care, as they should. At Roxbury we are verified compliant because we think it's the right thing to do. Someday we hope it makes business sense, too.