Reconciliation Comes Into Focus Again

June 1, 2010

Asset safety means more than simply an independent reputable custodian holding the assets under management. High profile frauds exposed during the financial downturn have highlighted the need for processes that ensure timely and accurate recording of assets plus an effective reconciliation between the books of the investment manager, custodian or other fiduciary (e.g. prime broker).

During the last eight years, publicly owned investment managers made asset reconciliation a priority due to the pressures exerted by risk managers, internal and external auditors, and compliance officers. Today, the pressures are being exerted on privately owned investment managers by investors, regulators and SRO’s. These interested parties share the view that reconciliation is a core control objective to a solid operational framework.

Private investment managers believe in controls, however in the past were not concerned about “best practices” as long as they “got the job done”. Accordingly, there was an overemphasis in the use of desktop applications, such as Excel and Access, as the primary tool for custodial reconciliation. Unfortunately, “getting the job done” also meant reconciling cash balances, and investment holdings less frequently than daily due to the manual nature of the process. Smaller private managers also did not have the luxury of carrying large staff as the public companies had done before automating their process.

The problems with using desktop applications are as follows:

  • They lack the sophistication necessary to easily generate a repeatable process
  • Data is usually gathered manually from the agents in whatever form is available (e.g. pdf, faxes, data files) and then manually entered or pasted into a spreadsheet
  • Research done and notes are not attached or carried forward to the reconciling items that remain open beyond the period reconciled
  • Management reporting (e.g. aging, number and size of items) is time consuming to prepare and often inaccurate
  • Violations of procedures and controls are much harder to detect in a spreadsheet environment

In reconciliation, efficiency is the name of the game. Reconciliation is the final line of defense in detecting and correcting a positional discrepancy that could have been caused by a trade error or a missed corporate action. In times where market volatility is high, any delay in such a discovery can potentially result in significant financial ramifications in addition to severe reputational issues with investment management clients.

Fortunately, major vendors offer reconciliation applications. SS&C, Electra, SunGuard, SmartStream and Fiserv are some of the software vendors that fill the needs of most investment managers. That being said, the selection process requires much rigor and discipline in order to prove that the right decision was made. The implementation process itself is even more challenging as substantial planning and commitment are necessary to fully leverage the application while meeting an immovable delivery date.