The firm has issued a white paper that includes calculations and principles of the t-standard and specifies under what conditions it should be used. The original implementation shortfall idea was developed by Andre Perold, a professor of finance and banking at the Harvard Business School, Cambridge, Mass. He first wrote about the concept in the spring 1988 edition of the Journal of Portfolio Management, in a paper called "The Implementation Shortfall: Paper vs. Reality."
"It (the t-standard) is not rocket science," said Bob Werner, a managing director for Russell's global implementation services that include portfolio transition, rebalancing management, policy management, interim asset management and commission recapture businesses.
"The problem is it's confusing to users," Mr. Werner said. He said deciding when to begin measuring the transition is the biggest issue Russell has bumped up against in its efforts to rally the industry around its t-standard.
"The only concern — and we hear it again and again — is the start date," he said. "To us it's simple — the pension fund wants to know the return from when they fired the old manager and hired the new one.
"If you're a pension fund and today you fired a manager who manages $100 million, you want to hold that manager accountable through today. After today, he's off the hook and you hire a transition manager, who's on the hook until the new manager gets the portfolio. If you called me Monday, I'm going to take the closing price from Friday."
Clearly, not all transition managers are comfortable with a hard rule on when to begin measuring a transition.
Ross McLellan, managing director at State Street Global Markets LLC, Boston, said that while 85% to 90% of the transitions his firm provides are measured from the close of the previous day's trading, transition managers — and plan sponsors — should not be held to one standard.
"The simple reason is clients sometimes want to use a different price," he said. "Many want us to use the opening price because they feel it's a fairer measure. Others want intraday. No two transitions are alike and certain times, the prior night's close may not be appropriate."
Charlie Shaffer, global head of transition management at Deutsche Bank Securities Inc., New York, said that while implementation shortfall is a good general measurement of a transition, it is not always helpful for plan sponsors in comparing transition managers, because no two transitions are alike.
"The problem is people try to use it to simplify something that's not simple," he said.
Deutsche Bank has been promoting its IS Fix product, which guarantees a zero shortfall transition and, Mr. Shaffer said, allows plan sponsors to more accurately compare two transition management providers.
"The only way to get an apples-to-apples comparison is to get providers to give you an IS Fix price," Mr. Shaffer said, explaining that with IS Fix, the provider takes on the implementation shortfall risk and is thus able to guarantee zero shortfall to the plan sponsor. He said most brokers will be able to provide a plan sponsor with an IS Fix quote but Deutsche Bank is the only firm that has made it a central platform of its transition management program.
That doesn't mean the transition is free, but the cost is based on what the provider will charge for taking on the shortfall risk, allowing for a clear comparison between the exact premium competing firms would charge to guarantee a zero shortfall transition.
He said the IS Fix is the only transition management "structure" that puts the risk of an unreliable estimate on the transition manager and not the plan sponsor.
