Traditional portfolio accounting systems are no longer necessary when providing client account aggregation in many cases today, a paper on the topic argues.

Improvements in the data provided by custodians, among other factors, has meant that in many cases traditional portfolio accounting systems are no longer necessary when providing client account aggregation, WealthTech Alliance argued in a recent paper.

The issue is particularly timely as “in an era where the wealthy routinely use multiple advisors, the competition to become a client's 'alpha' advisor is making the informed use of aggregation services almost mandatory,” said James Carney, chief executive of ByAllAccounts. “The exception is among investment managers that focus exclusively on their slice of a client's wealth.”

Indeed, portfolio accounting systems are still very much an essential component in many situations where aggregated data is used. (One example being when the product or service offered by an advisor requires that the aggregated data takes advantage of certain features – such as those related to administration and tax reporting – found only in their accounting system.)

The gist of WealthTech's paper, however, is that the overall role of portfolio accounting systems is diminishing.

“You absolutely have to get the data itself right, of course. But after that, really good reporting is many clients' key requirement,” said Ryan Kerry, founder and principal of Accusource.

The paper explains that when aggregation providers first entered the fray, the volume and quality of data available from custodians was “limited,” meaning imported data had to be “augmented” before it was fit for purpose.

A number of factors have led to improvements in data provided by custodians, including: online portals making data more visible and accessible to clients and advisors (prompting heightened demand for accuracy); that the role of custodians as providers of official “books and records” has intensified in the wake of scandals; new cost basis reporting regulations; and healthy market competition. (Although the paper notes there is still considerable room for improvement among some individual custodians.)

In line with this, players such as Black Diamond, Addepar and Private Client Resources have changed the landscape by providing data augmentation approaches that “were once the sole province of portfolio accounting systems,” WealthTech said.

“When you couple the capabilities of the newer alternatives with increases in data availability and quality directly from custodians, it becomes possible to implement a simpler aggregation architecture,” the firm added. “That architecture bypasses the accounting system in favor of an emphasis on the reporting capabilities that end clients prioritize.”

WealthTech also noted how, historically, portfolio accounting systems haven't tried to incorporate all the functions carried out by wealth managers. Providers of “specialized data unification systems,” on the other hand, have risen to the challenge.

InvestEdge, for example, has worked to reduce the number of interfaces required between systems (such as portfolio management, compliance, investment performance, client reporting, client portal and data aggregation) and in 2012 expanded its offering to directly provide for account aggregation.

“Advisors have a basic requirement to 'know your customer,' and getting access to all the client's investments is what aggregation solutions are for. Making that information valuable and actionable to the client is how advisors can effectively compete, and distinguish themselves in the eyes of their client,” explained Brian Burns, president of InvestEdge.

When looking to optimize existing aggregation architecture, WealthTech recommends that advisors ascertain what their priorities are and what it is they would ideally like to provide. Factors to consider include: Which custodians are involved and what are the breakdowns of volumes by each one; does the aggregated data need to be available for more than end client reporting purposes (and if so which systems/functions does it need to work with and from which should it be segregated); and what kinds of accounts need to be supported and what asset classes are they predominantly invested in.

In summary, the firm says that while traditional approaches to implementing aggregation capabilities were often centered on portfolio accounting systems, improvements in the data provided by custodians and the rise of SDUSs means they are simply no longer essential in many cases. Additionally, the firm advocates that, by simplifying aggregation architecture, advisors can potentially reduce the risk of errors, as well as lower reconciliation costs and make data available sooner.