Best practices

in reconciliation
10 steps to greater productivity
and performance
2 | Best Practices in Reconciliation

The decision to automate reconciliation

presents both a challenge and an
opportunity for firms: a challenge to
stay competitive and an opportunity
to make dramatic improvements in
efficiency and client service.

This communication is provided by Advent Software, Inc. (“Advent”) for informational

purposes only and should not be construed as or relied on in lieu of, and does not
constitute, legal advice on any matter whatsoever discussed herein. Advent shall have no
liability in connection with this communication or any reliance thereon.
 | 3

The Secret
Success Ingredient
Reconciliation is an often Done right, reconciliation is crucial to two checklist for optimizing reconciliation
overlooked and undervalued of the most important determinants of process efficiency, and weighs the pros and
activity, seen as a mundane— your organization’s success: front-office cons of alternative solutions—in-house,
performance and client satisfaction. third party or web hosted.
albeit necessary—function best
avoided. Unfortunately, reconciliation at many firms Ultimately, the decision to automate
remains a laborious, time-consuming and reconciliation presents both a challenge
risk-laden process, where staff are forced and an opportunity for firms: a challenge
to trawl through reams of spreadsheets to stay competitive, and an opportunity to
and tick off every transaction manually. make dramatic improvements in efficiency
This approach is inefficient and and client service.
unsustainable, severely limiting firms’
ability to compete.
High Cost of Manual
Automating reconciliation processes, and
implementing exception-based workflow
Reconciliation
best practices, offers firms easy wins
in the quest for greater productivity, Automation has become imperative
performance, efficiency and profitability. for the asset management industry.
Plucking this low-hanging fruit today is A powerful combination of forces—
a simple and obvious way to position challenging economic conditions,
your firm to prosper in whatever market increasing trading volumes, intense and
conditions the future may hold. globalized competition, a growing onus
on transparency and greater regulatory
This document explains why automated scrutiny—are creating ever more demands
reconciliation is quickly evolving into a for accurate and timely reconciliation.
competitive necessity. It details the costs And with daily reconciliation now seen
and risk associated with manual reconcili- as industry best practice, and real-time
ation and the benefits to be gained from reconciliation on the horizon, those
automation. It also outlines a 10-point pressures continue to escalate.
4 | Best Practices in Reconciliation

Automating reconciliation processes,

and implementing exception-based
workflow best practices, offers firms
easy wins in the quest for greater
productivity, performance, efficiency
and profitability.
 | 5

A powerful combination of forces—

challenging economic conditions,
increasing trading volumes, intense
and globalized competition, a
growing onus on transparency and
greater regulatory scrutiny—are
creating ever more demands for
accurate and timely reconciliation.

Yet all too often the trade and portfolio Non-Automated Reconciliation:
reconciliation process between an asset
manager and its various counterparties, as The Pain Points
well as internally within the firm, remains
labor intensive, error prone and costly. Any breakdown in the automation chain will > A temptation to “plug in” data just to
impact on your firm’s resources and risk make it reconcile.
Reconciling those external and internal profile. These costs and risks may take the
data flows by manually “ticking and tying” form of: > Poor client service, with its impact on
each transaction and position record is a client and asset retention.
time-consuming and tedious process— > Exposure to operational risk from
especially since investment managers unmatched items. > Staff time that could be spent on more
typically have multiple custodians and value-added functions.
other service providers. Not only does > Account errors that mean portfolio
the task divert staff time and attention managers don’t have an accurate picture > Employee discontent and turnover from
from higher value activities, but it is of how much cash or securities they have lower job satisfaction.
liable to result in unnecessary expense, available with which to trade.
significant mistakes, customer frustration, > Lack of operational scalability to meet
reputational damage, missed investment > A month-end reconciliation cycle changes in business volumes and take
opportunities, and potentially even resulting in day-to-day investment advantage of growth opportunities.
compliance problems and regulatory fines. decisions being based on old or
inaccurate data. > Inaccurate performance numbers,
potentially raising compliance concerns.
> A period-end reporting fire-drill focused
on “getting reports out the door” rather
than on producing them correctly in a
controlled and predictable manner.
6 | Best Practices in Reconciliation

The quickening pace of the market

and more demanding client
expectations have made high
quality reconciliation a competitive
necessity.

The Business Upside: Five Reconciliation has a central role to play where a position is misvalued they may fail
in achieving those goals. The quickening to hedge the exposure properly.
Competitive Advantages from pace of the market and more demanding
Automation client expectations have made high quality 2) Increased Productivity and
reconciliation a competitive necessity. Business Growth
The asset management industry is Replacing an error-prone, manual file-
facing a tougher economic, investor and matching process or creaky legacy Manual reconciliation processes that took
regulatory landscape that will intensify system with a time-saving, accurate and days or weeks can be done in hours by
competition between industry participants. automated environment offers significant leveraging an automated, exception-based
As a new report by consultancy Casey advantages on multiple fronts. reconciliation solution. Staff previously
Quirk observes1, rather than simply devoted to mind-numbing ticking and tying
outperforming similar-looking firms with 1) Informed Investment Decisions can be empowered to focus on more ener-
similar value propositions, successful gizing, higher-value functions in operations,
players will win by competing through Actionable information, delivered via client service and other areas of the com-
differentiation. user-friendly dashboards, is also the pany, which can help to grow the business,
cornerstone of effective front office increase revenues and streamline costs.
How can firms achieve that differentiation? decision-making.
The simple answer is satisfied clients. Moreover, because systems can handle the
Increasingly inflows will go to those firms Portfolio managers and traders depend reconciliation process faster and with few-
that can combine investment performance on up-to-date cash balances, transaction er errors, firms’ operations departments do
with strong client service and a reputation details and portfolio positions—derived not have the same scale constraints. As a
for trust and reliability. Asset managers from timely, accurate, reconciled data— result, they can support greater volumes—
that excel at communicating their to make better investment decisions and from increased trading, new client acquisi-
strategies are often successful in retaining minimize the firm’s risk exposure. tion, new lines of business, etc.—without
assets, even when their investment returns having to ramp up staffing levels.
are less than stellar. Satisfied clients are For example, having more cash than
also more likely to invest additional sums they thought could result in portfolio
in that manager’s funds. managers missing trading opportunities
and underperforming their benchmark. Or
 | 7

Portfolio managers and traders depend

on up-to-date cash balances, transaction
details and portfolio positions—derived
from timely, accurate, reconciled data—
to make better investment decisions and
minimize the firm’s risk exposure.

3) Improved Client Service the road—including by sharing account 5) Enhanced Compliance

information, reviewing and revising
Clients are demanding more and better investment strategies, and creating An automated reconciliation and excep-
access to relevant data. Sophisticated opportunities to cross-sell relevant tion management system reduces errors
client reporting in particular has become products and services. and operational risk, ensures standardized
an essential part of the customer procedures, and maintains accurate activ-
experience—as seen with the emergence However, before clients see that data it ity records and audit trails for regulatory
of interactive portals. has to be cleaned and checked—and that reporting. A firm that fully automates its
means properly reconciled, using a strong processes is in a much better position to
Attracting new clients and retaining workflow, on at least a daily basis. demonstrate compliance when required,
existing ones depends on cutting edge and keep pace with ever tightening and
technology that allows you the flexibility 4) Service Delivery Control more complex regulatory requirements.
to service investors how they want to
be serviced. We all now expect access By automating the reconciliation process,
to financial account information and and switching to an exceptions-based
investment insights on any device, environment, firms can gain enhanced
whenever and wherever we are. And we visibility into their counterparties’ service
expect that information to be current and delivery, and identify where process
error-free. Having to inform clients that improvements can be achieved.
their account details are wrong, or that the
investment performance must be restated With the aid of sophisticated investigative
due to data errors is not a recipe for tools and reporting capabilities,
satisfied customers. management can track where breaks occur.
Armed with intelligent insights into their
Similarly, providing portals for internal business and counterparty interactions,
users has become an important part of and the quality of service they receive,
the service mix. For example, equipping firms then have the power to review— 1
The Roar of the Crowd: How Individual Investors
relationship managers with mobile, and where appropriate renegotiate— Transform Competition in Asset Management,
interactive tools allows them to better agreements with their service providers. November 2015, Casey Quirk, www.caseyquirk.com/pdf/
engage with their end clients while on Casey_Quirk_Roar_of_the_Crowd_November_2015.pdf
8 | Best Practices in Reconciliation

An automated reconciliation and

exception management system
reduces errors and operational risk,
ensures standardised procedures, and
maintains accurate activity records and
audit trails for regulatory reporting.
 | 9

Figure 1

Custodian Reconciliation

COLLECT COMPARE DETERMINE

Compare custodian
Determine reconciliation
Collect daily transaction and transactions with primary
action for unmatched
position data from custodians source maintained in the
exceptions
portfolio management system

Figure 2

Broker Reconciliation

MATCH IDENTIFY AFFIRM UPDATE

Match trade
Identify and Affirm matched trades Update internal
allocations to
address exceptions (if an affirming party) systems
broker record

Best Practice Workflow Model

Automating the reconciliation process can In addition, some firms opt for a greater The reconciliation workflow can also be
bring significant benefits—provided the level of scrutiny by self-affirming, adding applied to any area where there is potential
right solutions and processes are adopted. broker reconciliation to their workflow so for data discrepancies. This could include
So what does implementation of a best they can catch and control issues further conducting NAV reconciliation with a
practices reconciliation environment upstream. (Figure 2) fund administrator, or reconciling with
entail? other internal systems e.g. the portfolio
Once the specific workflow stages have management system (PMS) with the firm’s
The first step is to identify the various been identified, firms can focus on making order management system or another
stages needed in the reconciliation each operate as efficiently as possible, and PMS.
workflow. There is no “one size fits all” thereby ensure the whole reconciliation
process, since different asset managers process runs smoothly. Whatever process you adopt, regulators
have different needs. However, most advise you fully understand your areas
firms implement some form of custodian of risk so you can design policies and
reconciliation, as that is the last check procedures to limit exposure.
before sending out client reports.
(Figure 1)
10 | Best Practices in Reconciliation

A sophisticated solution will assist

the exception management process
by automating as many functions as
possible, thereby increasing efficiency,
cutting costs and reducing errors.

Automating Reconciliation: Key capabilities to look for when 5. Customizable rules-based matching
considering a reconciliation IT framework engine with user-defined tolerances.
10 Steps to Greater Efficiency are:
6. Sophisticated investigative tools to
Once the best practices have been 1. Flexible data capture with automated identify exception root causes, and
identified and established, the next step access to two unique sources of aggregate similar exceptions for long-
is to introduce appropriate technology account activity: term resolution.
to automate each step of the workflow
puzzle. > Primary: Internal source (e.g. data held 7. Automatic exception prioritization
in your order management system). and assignment to ensure staff remain
Implementing an effective reconciliation focused on areas of greatest impact,
environment requires a solution that can > Secondary: External source (e.g. with ability to mark and set aside
capture, validate, match and reconcile custodial data aggregation service, pending items to be resolved later (e.g.
data between your portfolios and a wide clearing house, custodian website). if reconciling after a re-org or if the
range of external parties. And when breaks custodian is late in reporting).
occur, a sophisticated solution will assist 2. Centralized electronic data collection,
the exception management process by aggregation and normalization 8. Management dashboards,
automating as many functions as possible, from widest possible universe of customizable by role, to provide a clear
thereby increasing efficiency, cutting costs custodians/prime brokers, with daily view of critical, enterprise-wide data,
and reducing errors. connectivity and the ability to deal with including breaks by portfolio, group,
a multiplicity of file types. date, age, etc.

3. Immediate transaction amendment 9. Production and efficient distribution

capability, enabling staff to add/ of easy-to-read, high quality reports
replace data and track exceptions. to provide full visibility into cash,
holdings, transactions, trial balances
4. One-time mapping configurability to and security masters.
automate rudimentary or recurring
steps of data collection/processing, 10. Audit trail support to record all actions
enabling the user to focus solely on undertaken during the reconciliation
exception management. process.
 | 11

Implementing an effective reconciliation

environment requires a solution that can
capture, validate, match and reconcile
data between your portfolios and a wide
range of external parties.
12 | Best Practices in Reconciliation

It is vital asset managers dedicate their

technological and business resources
to strategic differentiators that will
provide the greatest competitive
advantage.

Technology Deployment Options

When it comes to implementing a best Whichever option you choose, it is

practice reconciliation framework, asset vital asset managers dedicate their
managers can choose from three broad technological and business resources
options: to those strategic differentiators that
will provide the greatest competitive
> Build—Use internal resources to design advantage.
and build a solution.

> Buy—Purchase commercially available

technology.

> Outsource—Hand off the process to a

third party.
 | 13

Technology Deployment Options

Pros Cons

> Develop the specification to > Costs of using internal technical

meet the firm’s exact needs and business expertise in
> Full control of the solution’s technology development
future destiny > Potential lack of expertise
> Risk of deployment delays,
resulting in outdated solution
Build
> Ongoing maintenance expense
and need to keep pace with
market, regulatory and
technology evolutions
> Distraction from core

> Leverage proven solution, built > Cost of purchase and

by experts implementation, and ongoing
> Benefit from pooled R&D in maintenance
future system development > Deployment lag time
> In-house customization potential > In-house IT staff costs
Buy
> Need for future upgrades

> Avoid large, upfront capital > Ongoing contract fee

investment > Perceived lack of control and
> Leverage IT and business data access
expertise
> Rapid deployment
> Immediate access to updated
Outsource functionality as it becomes
available
> Provider is responsible for
keeping pace with market and
regulatory changes
14 | Best Practices in Reconciliation

Make it happen

A Case Study
A $1 billion U.S.-based asset management This enabled the asset manager to
firm had one person doing all its automate its trading, settlement and
reconciliation manually at month-end using account reconciliation.
paper custodial statements and some
online tools. Without having to increase staff, every
account is now reconciled daily, and a
With about 850 accounts, the process took process that took more than a week has
more than a week. It meant investment been cut to approximately three hours.
decisions were made based on stale and Exceptions are uncovered immediately. By
potentially inaccurate data. And when noon, clients can get accurate positions
errors occurred they might not come to as of the previous day’s end. And portfolio
light until well after month-end, causing a managers and traders know they are
ripple effect of problems in the meantime. working with the most current, accurate
data available.
The firm decided to implement straight-
through processing technology to
automate the connections and integrate
data between its systems and external
parties such as custodians, brokers and
securities data providers.
 | 15

While automation in itself may be no

guarantee of success, a scalable and
repeatable process will provide the
foundation for stability and growth—
and a measure of protection against
market uncertainty.

Meeting the Challenge,

Seizing the Opportunity

In the face of soaring trade volumes, Introducing automated processes

increasingly complex transactions and wherever possible across an enterprise’s
mounting pressure for faster reconcilia- operations—with all the cost reduction,
tion, investment management firms today error minimization and scalability
face both a challenge and an opportunity. advantages automation brings —is one
The challenge is to meet the growing of the most effective ways for industry
market demand for accurate, real-time participants to gird themselves for
reconciliation regardless of volume levels. whatever changes and challenges lie
The opportunity is to increase efficiency, ahead. While automation in itself may
eliminate error-prone manual intervention, be no guarantee of success, a scalable
and reduce the labor and infrastructure and repeatable process will provide the
costs associated with reconciliation. For- foundation for stability and growth—and
tunately, technological solutions exist that a measure of protection against market
enable a firm to both meet the challenge uncertainty.
and seize the opportunity.
Who We Are

Advent, a business unit of SS&C, is helping over 4,300 investment firms in

more than 50 countries—from established global institutions to small start-up
practices—to grow their business and thrive. Delivering unparalleled precision
and ahead-of-the-curve solutions for more than 30 years, we help our clients
minimize risk, work together seamlessly, and shape the future of investment
management. For more information visit www.advent.com.

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