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NEW RULES MAKE IT EASIER TO COMPARE MANAGERS

IF YOU'RE looking for someone to manage your money, it isn't easy to figure out how one stacks up against another.

They all talk about how well they've done in the past, but those numbers sometimes can be deceiving, depending on how they were put together. And in a business where past performance is one of the most important parts of any money manager's resume, that can make it really tough for investors to make an informed decision.

This isn't to say that all investment managers cook their books to make their track records look good. But with so much scrutiny on their past performance, some managers might be tempted to bend the rules a bit to pump up their numbers.

That's why an industry group, the Association of Investment Management and Research, has developed a comprehensive set of standards for measuring performance. The goal is to make it easier for investors to compare the track record of one money manager with another.

"Prior to the standards, there was not a basis for comparison," says the AIMR's Cindy Kent.

So far, the standards are slowly gaining acceptance among the nation's largest money managers, but it will be some time before it filters down to the smaller managers who depend on individual investors for their client base.

"It will float down because the industry is going to demand it," says Ms. Kent, who was in Buffalo last week for a seminar on the group's standards that was was sponsored by the Buffalo chapter of the New York Society of Securities Analysts.

While the Securities and Exchange Commission requires money managers to disclose their performance, the details of what those figures are based on often are lost in the fine print, she says.

The AIMR standards also will allow investors to rest a lot easier knowing that their money manager's performance figures are accurate because it will make it much harder to manipulate their track records.

And there are lots of ways managers can artificially bolster their performance numbers. One of the easiest ways is to base their figures only on selected accounts.

Some managers may consider only active accounts, which excludes any portfolios from dissatisfied clients who shifted their disappointing portfolios to another manager. That would probably eliminate some of the manager's worst portfolios, which otherwise would drag down the overall performance figure.

Other ways may not be so subtle. Managers may base their performance figures on only their top account, while excluding all others. Or they may base their performance numbers on just a few top accounts.

Managers also may report only an average annual return for a period of several years, which could obscure several down years that were offset by a single good year.

"It's very hard to compare," says Diane A. Bishop, director of research at Robshaw & Cheskin Associates Inc., an Amherst investment advisory firm. "Is it based on one account? Is it their best account or is it a composite account?"

As a result, the AIMR came up with a set of guidelines for money managers to calculate their financial performance.

The most important aspect of those guidelines is that they are based on a composite of all of a manager's portfolios that have similar investment goals. While a money manager can have several different composite accounts (for stocks, bonds, etc.), each of their portfolios must be included in a composite, eliminating the chance that poor-performing accounts won't be used to calculate the manager's average performance.

"You don't have one account representing the performance of the firm. You have a composite of all accounts," Ms. Kent says.

The composite account also has to include any cash that is in the portfolio. Having a lot of cash can be a drag on a portfolio's performance when interest rates are low and the stock and bond markets are rallying, but it also can be a boon when the markets have a bad year.

The standards also allow managers to drop terminated portfolios from their performance figures only after the last full reporting period that they were being handled by the manager.

In addition, the standards take fees and trading costs into account. The total return also must be based on assets, which means bigger portfolios have greater weight in the final figure.

Yet despite the admirable intentions of the AIMR standards, don't expect local money managers to put them into effect immediately. None of the money managers at last week's seminar said they had adopted the AIMR standards, and only a few said they planned to adopt them anytime soon.

For one, the standards are so complex that many big money managers have shied away from adopting them. "People are frustrated with AIMR," says Boris Onefater, the manager of accounting and auditing services for the accounting firm Deloitte Touche in New York City.

The other problem, particularly for smaller money managers in places like Buffalo, is the cost. Adopting the standards requires more sophisticated record keeping and computer software, not to mention a significant amount of time.

The standards can get even more expensive if a money manager decides to have their performance figures verified by an independent firm, such as an accountant. While AIMR only recommends that the figures by verified, it can be an expensive step, ranging from $3,500 to $12,000 for each composite.

"The cost associated with verification right now is prohibitive," says Gerald J. Archibald, a partner are the Rochester accounting firm of Bonadio & Co.

But Archibald thinks the cost of verification will drop as more money managers adopt the standards and more accounting firms offer verification services. "Like any new product, the cost associated with verification will be declining," he says.

Despite the cost, Archibald doesn't think money managers will be able to put off adopting the AIMR standards for too much longer. "Your customers will eventually demand that you have some form of verification for them to review," he says.

Within two years, Archibald predicts that money managers will have to use the AIMR standards and have them verified if they want to deal with pension trust funds, non-profit organizations or government programs.

"If you don't do it voluntarily, it will be forced upon you" by the government, Archibald warned the managers.

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