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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.

Conversion Steps
Portfolio database conversion requires a multi-step process largely performed behind the scenes without much participation from an advisor. According to Hemant Moré, president of Arcons Technology, conversions begin by gaining access to an advisor's existing portfolio software application and retrieving source data such as transactions, prices, securities, and accounts. Moré describes Arcons Technology as a "traditional software development shop," and as such, it is capable of supporting database conversions using any database file format, even including conversions using data from Microsoft Excel files.

"Once we have the source data, we convert it internally to our own intermediate system, apply data mapping for custom labels, and convert the data to the destination format," said Moré.

Arcons Technology then reconciles monthly positions in every account for every month present in the source database. During the reconciliation process, Arcons identifies mismatched data and works with advisors to apply necessary corrections. Once all mismatched data is eliminated, Arcons delivers a SQL (Structured Query Language) database file formatted for the destination portfolio management software application.

Cloud or Local?
As access to source portfolio data is required, I asked conversion providers whether there is a difference between portfolio management software installed locally on an advisor's in-house server versus software running in the cloud.

"It really depends whether the cloud-based system allows data to be easily extracted or not," said Atindra Barua, president and CEO of TrustFort, LLC. TrustFort has converted over 1.6 million accounts in the last four years, and supports conversions from major systems such as Advent, Albridge, AssetBook, Orion Advisor Services, and more.

Kartik Srinivasan, director of strategic partnerships for Morningstar Office, agreed. "It's generally harder to perform conversions from cloud-based systems as most of the time the advisor cannot provide us a SQL database of their data," he said. Morningstar Office performs all database conversions internally and supports conversions from popular systems such as PortfolioCenter, Advent, and Principia CAMS (formerly dbCAMS).

According to Srinivasan, many cloud-based systems export limited data into Excel or CSV (Comma-Separated Value) files, making comprehensive conversion difficult. "Because of this, we typically request historical custodian files from the custodian for advisors who use cloud-based systems," he added.

Disparate Data
As one can imagine, not all source databases contain complete data. "Frequently we are merging data from multiple sources to build a complete database," noted Karyn Davenport, director of marketing for Back Office Support Service (BOSS). "Sometimes we receive a database backup from a portfolio management software system, and other times we are working with groups of exported files in various formats."

BOSS specializes in database conversions from a variety of systems into Schwab Performance Technologies' PortfolioCenter. In some cases, BOSS must recreate security transactions using data from statements obtained from account custodians.

"In a worst-case scenario, we work from reports or statements to fill gaps or to address incorrect, incomplete, or unreconciled data," Davenport added. "Once we scrub the data, convert it, and import it into the new database, we complete the setup and customization of the software to ensure the advisor has a working database when they receive it."

Delivering a database free of errors is the primary objective of all conversion providers, so a number of tests are applied during the conversion process to validate data integrity.

"We perform several quality-assurance checks before we hand any data over to the advisor," Srinivasan said. Quality-assurance examples include checking the total number of clients and accounts converted, reconciling account positions and holdings against custodial data, and comparing portfolio reports generated by the converted database with those generated by the legacy system. Procedures performed by BOSS, TrustFort, and Arcons also follow a very similar methodology.

Conversion Costs
As the number database conversions increases, providers can reduce the number of errors, total time required, and cost of conversions. Nevertheless, cost is often the primary factor advisors evaluate when considering a switch to a new portfolio management system.

Database conversions are often a significant project, and as expected, pricing for conversions largely depends on the total volume of data being converted. To better evaluate providers' pricing, I proposed an average advisory firm conversion scenario to determine their ballpark costs. My example firm managed roughly 1,000 client accounts and $200 million AUM with historical data going back about 10 years.

BOSS estimates the total work required in determining database conversion fees. "Each conversion is priced based on the amount of work hours needed to complete it," said Davenport. "Your example would likely have a minimum conversion cost of $15,000."

TrustFort bases its conversion pricing on the total volume of transactions, securities, and positions contained in the database. "In the example provided, conversion costs would be around $5,000, which includes full position and performance reconciliation and composite data extraction," said Barua. Conversion fees are lower if an advisor requires only simple data extraction and translation.

Arcons Technology's conversion fee depends on several factors, including the total number of accounts, number of months of historical data, number of securities, security types, and source data quality. According to Moré, the fee to convert the example advisory firm's database would range between $10,000 and $15,000.

Finally, Morningstar Office takes into account the total number of accounts, amount of historical data, number of legacy custodians and data sources, and source data quality to determine its pricing. "For the firm profile you described, the ballpark range would be $5,000 to $8,000," Srinivasan said.

Several portfolio accounting software providers offer database conversion services for free under certain promotions or long-term contract requirements. Nevertheless, advisors will need to determine the total cost of transitioning to a new portfolio management system, including any potential server or Internet bandwidth upgrades, employee training, and database conversion costs. The due diligence process should examine many more attributes beyond the initial cost of database conversion.

Fortunately, portfolio database conversions are much more common today among advisory firms than they were several years ago. As more database conversions are performed, service providers are able to reduce costs and provide better data quality. Advisors should no longer feel captive to the current portfolio management software they use, knowing that providers exist with the experience and capability to perform accurate data conversions, all for a reasonable fee.

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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