By Ted Meissner, CEO of Ledgex
Every day – across investment offices, foundations and endowments – a flawed process is repeated. Accounting and investment pros struggle to collect timely, up-to-date information that will enable their firms to manage diverse portfolios and make better, faster decisions. And every day, the results are the same; an inability to quickly verify and audit sources, accompanied by discrepancies and a lack of confidence in data.
What's needed is greater data transparency, after all, even the most sophisticated data analytics won't make a difference on the bottom line if the information can't be trusted. Yet, this hurdle may finally be crossed by a technology approach that brings together accounting and investment books of records (ABOR and IBOR).
In doing so, workflows could be streamlined, and new data insights unearthed, providing portfolio managers with more relevant information and time to manage assets, thereby creating greater value for their customers.
It's about time
Gathering quality multi-asset data is labor-intensive and requires workarounds because it comes from third parties using different timetables and formats, such as fund managers and outsourced accounting firms. For instance, while there are some incredibly smart minds behind hedge and private equity funds, the way they communicate with their investor base is often via PDFs, which they routinely modify to include custom information.
This can thwart data gathering tools, so investment firms must undertake a painstakingly slow manual roundup and entry process, which also raises the likelihood of errors. Even those few firms that have adopted optical character recognition encounter issues that erode data confidence. Adding to the confusion, this information is supposed to be used for multiple purposes, and when you have staff importing and re-keying details into various places, data silos are going to form.
When you're operating within silos, almost by definition, tasks are duplicated and ongoing reconciliation is needed. Unfortunately, many functions and individual leaders keep their own spreadsheets and don't share the numbers. Data can also get trapped in specific software applications for accounting and reporting analytics, and there's common information that they should be sharing.
It's all about time, literally. There are only so many staff hours to accomplish things manually – yet there's also that need for more timely data to support better decision making. Even when markets are stable, if reports that assess portfolio performance arrive weeks after the close of the month, that lag can result in missed opportunities.
If financial markets are relatively stable, this delay might be tolerable, though not ideal. However, as market performance becomes more volatile – which can be prompted by things like political unrest, a pandemic and social upheaval – these lags can prove to be extremely costly.
In the shadows
While many investment firms have their own accountants, a good number outsource this function. So, debits and credits are getting booked externally, whether by a custodian or third-party administrator. Problems arise because external third parties don't always have a clear understanding of what form the data should take – and sometimes the client doesn't know either.
As a result, clients get frustrated when their accountants can't provide the data they require when they urgently need it. They complain because they struggle with reconciliation and feel compelled to double-check the work.
Unfortunately, some decide that instead of working with the custodian to make sure the work is done correctly, they create a shadow system. Basically, the client redoes everything the third party custodian does, which is massively inefficient, but deemed necessary to ensure they have confidence in the results.
Still, this creates even more silos, resulting in even more inconsistent data across a firm. COOs and CFOs get frustrated because they don't understand why departments are failing to use official, approved tools. Inefficiency snowballs, costs grow, integration issues arise, all of which can now be avoided.
Recent technology developments are giving hope to asset managers by offering the potential to process and analyze preliminary and estimated information along with final accounting data. With the possibility of combining ABOR and IBOR in a single solution, investment offices may no longer have to spend countless hours chasing and proving the quality of their data in order to make real-time decisions.
Data engine technology has the ability to record data once and intelligently deliver it to the appropriate downstream system for general ledgers, private investments tracking, as well as performance reports and analyses. Also, indexing can provide deep insight into the quality of data they receive, along with an audit trail. Based on stringent parameters and data points, it is possible for algorithms to analyze key data indicators and assign each piece of information a level of confidence.
Through this approach, estimated and final data can share the same report, enabling users to quickly gauge data dependability. Increased accuracy and order can support period-based accounting side-by-side with the best available performance data. Time-consuming reconciliations can be eliminated and shadow systems no longer required, even for such things as internal estimates. Plus, new data insights can be revealed, prompted by the ability to look at data in different ways such as time series and allocation prisms.
Most of all, teams can record transactions and market values when obtained and automatically stage them for review and approval for the entire office to use with confidence.
One for the books
This technology approach is driven by software providers who now have the capabilities to design solutions to ingest data in the most manageable way possible.
This, in turn, increases the likelihood of efficiency and minimizes confusion, ensuring maximum competence. Simply put, investment firms can give more attention to adding value instead of focusing on menial tasks.
It's been a long time coming, but should this potential be realized, it could be one for the books for accountants and portfolio managers – a solution offering game-changing improvements in data accuracy, transparency and timeliness.