Don’t Let the Tail Wag the Dog: Put Your Portfolio First When Selecting a Portfolio Accounting System

When I was a technology consultant I would, from time to time, receive inquiries such as “I am considering Advent, Archway Technology or Investran, for portfolio accounting”. I would wonder how the person identified such a random short list of vendors for consideration.

I have used a similar example in discussing how to better understand your “technology personality”. By understanding your preferences you can streamline the search and selection process. The same holds true in understanding your investment portfolio makeup. The better you understand how your investment portfolio drives requirements, the better your search process will become.

Most accounting systems are developed from the ground up to support certain asset classes and security types. Referring back to our example: Advent is a market leader in supporting marketable securities, Archway is one of the few systems to support both alternatives and marketable securities and Investran is focused on private equity accounting. These systems can support a range, but each vendor has a core focus. Knowing what your core needs are will help you find a better match. Remember it is not about finding the cheapest system, but the one the will provide you with the best return on your investment.

Before engaging in a search and selection process it is important to take some time to analyze your existing client portfolios as well as understanding the potential future state of your investments. Your portfolio is the dog that should wag the selection tail. While technology restrictions rarely limit your  investment approach it can cause inefficiencies in your back office. Ideal you want your front office investment approach to be in harmony with your back office technology capabilities. Misalignment will result in significant back office inefficiencies and operational pain points.

Portfolio make up can be broken down into three main characteristics:

1.) Asset Classes. At the highest level one basic way to look at the portfolio is to understand your investment portfolio in regards to marketable securities vs. alternative investments. Both types of investments have their challenges. Marketable securities, such as equities, can have complex corporate actions that will affect your cost basis calculations. Fixed Income securities have special attributes such as call dates and analytics such as duration and yield calculations that need to be calculated. Alternative investments—private equity for example—have capital commitments that need to be tracked. Even performance calculations between the two types of investments (TWR vs. IRR) can be very different. Understanding your current exposure as well as understanding your future state exposure will help provide focus in your search process.

2.) Ownership Structure. How the investments are owned (direct or via pools) and how they need to be represented is another major factor in determining your requirements. Are the assets held in a trust? Does this require you to break out transactions on an income and principal? Are your alternative investments held in a partnership? Will you need a system\module to calculate your client’s beneficial interest in that partnership? Do you invest in separately managed accounts that need to appear as a single holding in an asset allocation report? The complexities will be a major factor in determining which vendors can best meet your needs.

3.) Asset Location. What level of influence do you have in where the assets are custodied? Do you have dozens of custodians and more being added all the time? When selecting a portfolio accounting vendor you want to make sure your data is portable. The level and quality of the data you access today should be as good, if not better, when upgrading your accounting capabilities. In an ideal world, how you access your data should be a separate decision from where you custody assets and what systems you use. In reality that is not the case. Some data sources are tied to specific software solutions. Likewise, some vendors will only have integrations with a limited number of custodians. These factors should decide what systems to use, or where and how many custodians you use, but the reality is they do affect these decisions.

Another important consideration that is driven by where the assets live and\or where your clients live is multi-currency reporting. The ability to track and report on local and base currencies is a fundamental capability that some vendors support and some do not. If you have this need, you will want to use it as a driving factor in the selection process.

Understanding your investment portfolio is like understanding your technology personality. Some factors are preferences and some are inherent. Portfolio characteristics are inherent and you should have a clear understand of how they will drive your requirements before setting out on a search and selection process.  

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