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Avoid Legacy Portfolio Software Constraints

As providers perform a growing number of portfolio management software database conversions, advisors should no longer feel captive to any one portfolio management system.

Bill Winterberg, 08/09/2012

Established investment advisory businesses manage numerous active client relationships, many of which span multiple decades. As client engagements endure, advisors generate large databases with respect to historical investment activity performed in client accounts. At the same time, innovations by portfolio management software vendors have many advisors contemplating a switch from their current system to capitalize on new features and functionality.

With so much legacy data maintained in their existing systems, advisors are concerned that converting their database can turn into a costly, time-consuming, and error-prone process. Today, a growing number of service providers specialize in portfolio accounting database conversions, giving advisors the freedom and flexibility to switch to the accounting system that best meets the needs of both the firm and its clients.

Database Discontinuity
Portfolio management software is one of the essential programs advisors use to manage client investment accounts. Software programs in this category store transaction-level detail across all client accounts in a large database, allowing advisors to view and report on a wide range of portfolio statistics. Advisors commonly use historical transaction details to review the cost basis of individual securities, realized and unrealized capital gains and losses, portfolio investment income, total asset allocation, and portfolio performance relative to a suitable benchmark.

However, each portfolio management software provider structures its database using a proprietary taxonomy, making it difficult for advisors to convert from one software system to another. For example, PortfolioCenter® from Schwab Performance Technologies® links individual investment accounts to records called Portfolios. Each Portfolio is identified by a label called the Description, which is typically the account owner's name or the name of the owning entity (e.g., a trust).

Multiple Portfolios can be combined to form Portfolio Groups, which is typically done to join multiple Portfolios held by one family. Organizing Portfolios into Portfolio Groups facilitates consolidated reporting, billing, and performance calculations.

In contrast, Morningstar Office (a software product offered by the same company that runs MorningstarAdvisor.com) identifies individual accounts simply as Accounts. Multiple Accounts are then linked to entities called Clients based on account ownership. Clients can then be linked to Households for consolidated reporting, again typically based on family relationships.

In theory, portfolio database organization concepts are very similar across many software providers, but the specific ways data is formatted and stored varies widely. In addition, transaction details such as security symbols, transaction type (buy, sell, dividend reinvestment, etc.), share price, share quantity, and total transaction amount are also not standardized.

The reality is that all of the historical portfolio data must be manipulated and reformatted when moving between portfolio management software applications. Experience with multiple database formats is essential, and successful providers employ consistent processes to reduce database conversion time, errors, and cost.

Bill Winterberg, CFP, is a technology and operations consultant to independent financial advisors. His comments on technology have been featured in a variety of financial industry publications. You can view more information about Bill and see his schedule of upcoming speaking engagements at his Web site, FPPad.com. The author is a freelance contributor to MorningstarAdvisor.com. The views expressed in this article may or may not reflect the views of Morningstar.
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