In-house portfolio accounting systems might have been a way to save costs and get the customization you want, but unexpected changes can limit the effectiveness of in-house systems and result in higher costs down the road.
At first, it sounds normal and natural to want to keep teams and systems in-house; the premise is that you have more control over everything. Besides, there are some functions that, according to the firm’s circumstances, cannot be done by third-parties.
You want things to run smoothly by having everything internal, but put into practice, it’s more challenging than expected.
Controlling everything under one roof can put an extra workload on often overworked teams, and such allocation of time and resources gets harder and harder to justify.
Building an in-house portfolio accounting system is one example where an in-house task can present more complications than initially anticipated.
Those who developed and managed your in-house system knew your firm’s needs in and out. They must have done a great job producing reports whenever you needed them.
But what happens when they leave?
In many cases, the knowledge transfer period isn’t long enough, and the documentation is limited, outdated, or nonexistent.
There likely wasn’t any documentation for processes because, well, the former team members built the system, and why would they create documentation for something they already know?
The replacements may not be skilled enough to run the portfolio accounting system, and this can present a major risk.
Corporate actions can’t be processed, and timely reports can’t be produced, just to name a few examples.
It might be embarrassing having to call the recently departed team member(s) asking for assistance.
To put it simply, the portfolio accounting system may have been built in simpler times; the industry has changed.
Your firm might be now trading in multiple currencies, different asset classes, and with an increased variety of international securities.
The in-house system can’t handle everything, and what your team built looks more and more outdated, especially when newer systems can do what you’re looking for.
Just as the system can’t handle complexity and is becoming outdated, the other challenge with an in-house system is that it may not be conducive for working with other systems.
Whether it’s connecting with various data feeds or importing/exporting data, the system your team built just is not compatible.
What’s worse is that even if you decide to switch to a new portfolio accounting system, successfully migrating data from your old system to a new one is not always a guarantee, and the time to complete the process, successful or not, could be painfully slow.
Even though you know the in-house system may not be the best solution these days, your firm invested a lot into the current system, and the organization just wants to get a return on investment, so it continues using the in-house development.
The other issue is that the current system may have cost so much to develop that there isn’t any wiggle room in the firm’s budget to invest in a new system. In short, you’re stuck.
Despite the risks associated with an in-house portfolio accounting system, it’s not always possible to just walk away from what’s already in place, not right away at least.
Investment firms can still make the most of their situation, whether it’s looking to save time and monetary resources, or generate greater efficiencies.
Hiring a third-party team could be an option. These third-parties, usually in the form of middle- and back-office outsourcing companies, are specialists in portfolio accounting and can be systems-agnostic. They should be able to handle daily reporting, security master file maintenance, among other tasks.
They could also develop a bench of back-ups to eliminate key-person risk, the same risk that hurts a firm when those who build the in-house systems leave.
If you want to move to a cloud-based system, try looking for a turnkey asset management platform (TAMP) provider that has a newer, more robust portfolio accounting system. Also, ask about how they handle data migration.
Though it was mentioned earlier that migration could get messy going away from an older, in-house system to another one, some service providers may be able to work well migrating data from your current system.
According to a Thomson Reuters report, 68% of wealth managers say learning about and keeping up with new technology is the top challenge they face. Given these findings, teaming with an outsourcing provider or cloud-based TAMP services provider can alleviate concerns.
And if budgets are what is holding things back, make a compelling case to your CEO or CFO.
Show how the firm would save x amount over x years by switching. Talk with a third-party or turnkey operations services provider, and get a proposal from them, to further justify your claim.
Whether it’s the people who built the system leaving, the inability to handle complexity, the incompatibility with other systems, or just simply an issue of cost, in-house portfolio accounting systems present their share of risks.
But despite the risk, there are ways to deal with it, be it hiring a third-party to run your systems or switching to a turnkey investment management platform that can integrate with your existing system.
If costs are an issue, get a proposal from the third-party outsourcing or turnkey investment management service provider, and present to your team to support your position.
If you plan to build your own system, at least you are aware of what to expect beforehand.
And if you already are using an in-house development, you still have options, too.