Successful investment management relies on a holistic view of the business. It requires information that allows a manager to analyse risk and exposure at any given time, facilitating responses to sudden market moves or volatility. Portfolio management may be the star of the show, but it is just one part of the whole picture that becomes clear when viewing the business from an accounting perspective.
A reliable accounting platform integrates core operations and revenue generating activities, providing the control framework for managing and mitigating risk. It is the means for recording, analysing, verifying and reporting business and financial transactions. It supports day-to-day operations by providing management the reports and information that allow an organisation to understand its true revenue position, to analyse the impact of business decisions, and to plan and prepare for the future. It is through accounting that reports are derived for regulators. And a state-of-the-art platform provides the high degree of flexibility now essential for organisations looking to readily adapt processes to suit changing regulatory and business environments.
When legacy systems can't cope
The amount of change faced by the industry today has created a markedly different environment for investment managers compared to just 15 years ago. While an accounting platform has always been an important foundation, legacy systems were never expected to cope with the degree of business growth or the amount of regulatory reform now required.
As financial reforms such as the US 2010 Dodd-Frank Act are introduced, many investment managers are discovering that their old accounting platforms are ill-equipped to adapt to the new requirements. Unfortunately, the only solution open to these organisations is to replace the platform. Realistically, such a project is likely to take upwards of a year during which time the organisation must somehow manage its risk exposure.
Investment accounting is different
In addition to the standard transactional and business data that a generic accounting system provides, investment accounting solutions must address several industry-specific requirements including the following four key functionalities.
Asset custody and safeguarding: Investment managers must be aware of the location and availability of all assets held in the firm’s portfolios in order to safeguard them. Assets may be in physical or book-entry form and may be kept in-house, with a depository or with a custodian. Usually, a team within the firm’s core operations group is responsible for accurately recording on the accounting platform each asset’s location, type of registration and the specific asset positions for each portfolio and customer account. The complexity of these processes is magnified considerably for investment firms that trade internationally due to different practices, regulations, taxes, settlement cycles, etc.
Securities servicing: Securities servicing encompasses asset set up, ongoing asset pricing, income processing, corporate action processing, class action processing and shareholder servicing. Servicing relies on the use of both internal and external information, including automated data sources, to accurately reflect detailed asset-level information and asset-related events on the accounting platform.
Each security must be properly set up within the accounting platform in order for the appropriate team within the core operations group to monitor servicing by the firm’s custodian. A common asset record may be established for publicly-traded securities; complex and/or unusual
instruments (e.g., mortgage-backed securities) may be set up on specialised systems that interface with the accounting platform for necessary information transfer.
Accurate instrument coding is essential to ensure proper income processing, maturity processing and tax reporting.
Because of the far-reaching effects of securities servicing, the information is relied upon by many parts of a firm – from those areas involved in pricing, to income processing and compliance.
Security transaction processing: Transaction processing involves tracking the acquisition and disposition of securities. Those tasked with tracking security purchases and sales must ensure that trades are “known,” that sufficient cash exists with the firm’s custodian to take possession of securities on settlement date, or that the appropriate securities are available for delivery in the case of a sale. Again, all of this is tracked through the firm’s accounting platform and reconciled with the firm’s custodian and other internal systems. Through direct interfaces with other systems, much of this work can be automated.
Cash transaction processing: Cash transaction processing includes cash disbursements, receipts and fee processing. The firm’s accounting platform facilitates record keeping by mirroring balances and transactions that should occur within the firm’s cash accounts at financial institutions and custodians. Those tasked with monitoring cash transactions must ensure that all transactions are accurately performed in a timely manner and that the firm’s records mirror those at financial institutions and custodians.
Blueprint of a good investment accounting solution
Investment accounting systems come in a variety of shapes and sizes. Some are configured to be implemented as modular solutions and integrated with existing operating, trading or risk
management platforms. This is where legacy systems are most frequently found.
The more agile systems are embedded with an operating platform that serves as the core processing system for the organisation, and on which trading, risk management, collateral and
other functional systems can be added. By selecting a single platform, storage and retrieval of securities and holdings data to each functional area can be seamlessly integrated and managed. This ensures there are no gaps in the organisational work flow that could lead to errors or inconsistencies as transactions are initiated, processed and reported. Automated straight-through processing across front, middle and back operations can be introduced with relative ease and audit trails become easier to capture.
Best-in-class accounting systems consolidate data storage to and retrieval from a single centralised database. This database is the repository for recording all financial holdings and
positions; it serves as the “golden record” for the firm. It connects to the general ledger and is the single point of record for all financial positions and holdings. As such, it is a common element used by each functional area and system in the firm’s front, middle and back office, and provides a means to achieve transparency and data consistency across the enterprise.
Other facets of a best-in-class accounting platform include the ability to provide complete instrument coverage, real time data and multi-currency capabilities.
The investment accounting system is the backbone of an asset management firm and a common denominator across all other functional areas. A sub-par investment accounting system not only creates potential risk and increases costs, but also impairs the effectiveness of other areas in the firm.
Alternatively, a best-in-class system that centralises data on a single operating platform will bring much-needed efficiency to a corporation’s investment accounting operation. It reduces risk by providing an integrated and transparent enterprise view of all assets held under a firm's umbrella.
By eliminating the need to run multiple systems, personnel and system maintenance costs can also be reduced. Unlike legacy systems, a best-in-class investment accounting solution will also provide the flexibility to adapt, the space to grow and the process guidance to ensure adherence to current and future regulatory regimes.
Peter Hill is the managing director of SimCorp.