Several years ago I was responsible for the global operations of a $350bn asset manager running institutional and private client money and mutual funds. We had 250 operations staff; 60% were responsible for day to day account reconciliation. We had no automated reconciliation, no automated data delivery and aggregation; everything was manual or using spreadsheets based on exports from numerous internal accounting systems and paper statements from a large number of custodians. The staff worked very hard in difficult circumstances, and to their credit, we generally kept on top of the problem. When we didn’t, there was pandemonium!
This scenario is hard to envisage today. Companies of this size would almost certainly have automation around the process, and probably a much lower head count engaged in the process. I am sure reconciliation systems were available at that time, but the focus for the business was rationalising portfolio accounting systems and the system that was being built for the firm didn’t have reconciliation anywhere near the top of the requirements list.
Many portfolio management systems (PMS) have some form of reconciliation functionality built in. Some are rudimentary (e.g. positions or balances, no transactions), others are more sophisticated. These add-ons are typically used by the smaller organisation, and businesses with meaningful volume or complexity will almost certainly have a dedicated reconciliation system.
There are good reasons for the reconciliation system to stand apart from the PMS. They bundle together all the functions that you might need with reconciliation; flexible and automatic data aggregation, user-definable match rules, workflow, research and remedial action tools, exporting and correction processes, audit trails etc. Most importantly, and perhaps the primary reason for them being segregated from the PMS, is that the data structures and operating logic are very different. The PMS is a real time position keeping and valuation system responding to current and backdated transaction, price and exchange rate changes. A reconciliation system is an auditing tool; it does not change data historically given a new transaction or price. Historical integrity has to be maintained long after the portfolio accounting system has moved on. If it didn’t, its function as an audit tool would be lost. It is a different beast.
But there is more to reconciliation systems than simply mitigating operational risk. Consider that it contains a set of data that no other system has. It has much of the data from the PMS (and indeed what was in the PMS at any point in time throughout history), but it also has all the equivalent data from the third parties or other systems that form the other side of the reconciliation. It also has all the workflow events associated with breaks and their resolution. Long after the job of the day to day reconciliation has been completed there is the opportunity to extract trend information at a very granular level. The intelligent user of such data provides a unique and vital insight into the integrity of the operational processes both internally and externally. With this information improvements can be identified, prioritised, implemented and measured for effectiveness. The performance of third party providers can be accurately measured and presented. Consider the power of this data when reviewing custodian or administrator service levels!
There is much more to reconciliation than meets the eye. Using the correct tools for the job will reap considerable benefits to the operational integrity of your business. How things have changed!
Attend ReCon London on May 7, 2013 to hear more from Watson Wheatley and to hear what your peers and industry experts are doing to address current issues around reconciliations and exception management.