The advantages and impediments to adopting performance reporting systems
- December 1, 2023: Vol. 10, Number 11

The advantages and impediments to adopting performance reporting systems

by Mike Consol with Ryan Donovan, Raj Iyer and Steve Leivent

Among the impediments to financial advisers’ ability to integrate alternative investments into client portfolios is the ability to generate timely, accurate and meaningful information for clients.

That’s the bad news. The good news is technology has given birth to a host of performance reporting systems that accomplish the task at hand — diversifying portfolios, tracking performance and reporting the results to clients in a telling manner. Imagine being able to build personalized reports with an intuitive drag-and-drop interface.

We asked a trio of executives in the space to update us on the current state of the art and the considerations that need to be taken into account when buying and integrating those systems into an RIA’s operation. Specifically, we called upon Ryan Donovan, a senior vice president at Orion; Raj Iyer, chief product officer at Templum; and Steve Leivent, who is co-head of SS&C Advent and runs Black Diamond.

What are the benefits of using a performance reporting system?

Raj Iyer: Performance reporting systems allow advisers to build better relationships by more accurately managing allocations for their clients. By automating the collection and reporting of client portfolio data, these systems can remove the manual work associated with collecting, compiling and reporting investments.

Ryan Donovan: A performance reporting system offers several benefits for advisers and wealth managers in the private assets space. As the name implies, calculating investment performance provides benchmarking of managers and the ability to reassess realized returns against expectations set with the comprehensive financial plan. More importantly, for ultra-high-net-worth clients the system provides consistent and transparent account aggregation and reporting across a wide range of assets. When combined with the financial liabilities gathered from the planning process, the adviser has a personal balance sheet with projected cash flows and net worth. This allows advisers to easily track complex estates and deliver a comprehensive view of their clients’ wealth.

Steve Leivent: The utilization of a performance reporting system offers a multitude of advantages to significantly enhance the efficiency and effectiveness of wealth management firms, including enhanced adviser-client interaction, aggregation capabilities, informed decision making, comprehensive functionality and technology integration.

How does it assist wealth advisers in diversifying portfolios with alternatives and hard assets, including illiquid assets?

Donovan: These systems provide tools and analytics that help advisers factors beyond the risk-and-return characteristics of different asset classes. Portfolio management systems enable advisers to make informed investment decisions and allocate assets effectively.

Leivent: The technology available today is pivotal in assisting advisers to diversify portfolios by encompassing a wide array of assets, including alternatives and hard assets, even in cases involving illiquid alternative assets. It gives advisers the power to present a comprehensive financial picture to a client, to report liabilities, and to automate the collection and reconciliation of financial data.

Iyer: Performance reporting systems give advisers tools to manage portfolios against benchmarks, create scenario analysis, compare the impacts of various investments and provide insights into new opportunities, while alternative assets provide opportunities for increased performance and diversification. These assets are often difficult to model, as there is less data than in commonly traded assets and require accessing a wider set of data sources. As such, incorporating data from these assets into analysis and insights can be challenging. Taking a systematic approach with tools to access, store and analyze data is critical in order to offer these assets to clients. For alternatives, it is important not to simply apply legacy data tools but use reporting systems that are built to understand the data and structure of private markets.

What are the different types of performance reporting systems?

Leivent: Performance reporting systems come in various types and configurations, each catering to different organizational preferences and requirements. On-premises systems are hosted on a specific server, typically at the organization’s headquarters, offering a degree of control and security. In contrast, cloud-based systems are accessible online, providing flexibility and accessibility from any location with an internet connection. Another stratification is based on a partnership philosophy, ranging from all-in-one solutions to integration hubs. All-in-one systems consolidate all necessary components within a single stack, often acquired from a single provider. Integration hub systems allow advisers to select and integrate various components from different providers, offering greater customization and flexibility to suit specific needs. Premium platforms are highly configurable and adaptable to user requirements, providing comprehensive solutions for diverse use cases. Choosing a performance reporting system depends on an organization’s needs, preferences and goals.

Iyer: The simplest systems consolidate information on client investments and provide the information in one place. More sophisticated systems allow benchmarking performance and correlations to better inform performance. These can also provide insight into certain sectors such as commodities, real estate and private markets. Some systems are starting to incorporate predictive analytics and AI to provide recommendations and better model real-world impacts into client portfolios.

Donovan: There are different types of performance reporting systems available in the market. Some systems focus on providing basic reporting needs. These systems require the adviser supplement activities with additional vendors or manual processes. Increasingly, the industry has moved to incorporate more advanced features such as risk analysis, integrated estate planning, tax managed trading and investment solutions as well as compliance monitoring. One of the greatest advances to support private assets is optical character recognition, which enables systematic PDF data extraction, validation and investment accounting integration with the performance system. This eliminates an extremely manual activity borne by many private asset investors and their advisers. Ultimately, the choice of system depends on the specific needs of the organization and its budget.

What are the chief motivations for organizations deciding to buy a performance reporting system?

Iyer: There are multiple motivations for buying a performance reporting system, and they all relate to building better investor relationships. These systems allow faster issue resolution by bringing all information together in one place and improve the adviser’s ability to understand options available for investors by incorporating investor profiles and history with the available set of investments. Advisers looking to access a wider range of investment opportunities ­— such as alternatives — can leverage these systems to bring all investments into one place to better manage client objectives.

Donovan: One of the chief motivations is to enhance their ability to provide accurate and timely reporting to clients. These systems automate the reporting process, reducing the time and effort required to generate client reports. Additionally, performance reporting systems help organizations meet regulatory requirements and improve transparency, which is crucial for nonstandardized reporting from managers and administrators in the private asset industry.

Leivent: Organizations invest in performance reporting systems to efficiently aggregate data from various sources, especially as firms expand and handle multiple custodians. A centralized platform eliminates the need to access disparate systems, facilitating smoother and more comprehensive client communications. Additionally, the motivation to streamline various functions, such as billing and trading, into a single integrated area drives the adoption of such platforms.

What are the chief impediments to adoption?

Leivent: The primary impediments advisory firms may encounter when considering the purchase of a performance reporting system are cost constraints. Additionally, the inability to allocate sufficient resources for successful implementation and ongoing utilization can pose a significant challenge. Finally, resistance to change within the organization can act as a barrier, especially when transitioning to highly configurable systems, as the benefits of customization may entail trade-off costs. Addressing these impediments through careful planning and resource allocation is essential for successfully adopting new technology.

Iyer: Once the adviser has chosen a system for their needs, they must determine how to implement the system, which includes choosing data sources to automate. This includes both client/investor data as well as market and investment data. Systems can make this implementation simpler by providing connectors to common data sources to ease the implementation.

Donovan: One of the chief challenges is the integration of data from multiple sources. Most investments require manual entry of complex investment structures and illiquid assets. The advancements in optical character recognition eliminate the manual data entry and alleviate this complex task.

What are the factors to consider when choosing a performance reporting system?

Donovan: Organizations should consider several factors; these include the system’s ability to handle complex investment structures, its scalability to accommodate future growth, the level of customization it offers, and its integration capabilities with other systems used by the organization.

Iyer: Factors include ease of use, analytics and access to markets. The system must be easy to use and provide reporting for investors. It should also provide analytics that match the requirements of the adviser, like modeling factors in client portfolios such as tax impacts and investment objectives. It’s important that it reports on a wide range of investment options, including public equities, fixed income and alternatives. With alternatives becoming an increasingly large part of allocations for certain segments of investors, it is critical that these systems can manage reporting for all investments and opportunities.

What are the potential glitches, human and technical, an organization might run into while implementing a performance reporting system?

Leivent: Implementing a performance reporting system can indeed be a complex endeavor. One critical factor is securing the buy-in of potential users within the organization. Resistance to change or a lack of enthusiasm from key stakeholders can impede the smooth adoption of the system. Additionally, during implementation, organizations may uncover unanticipated needs or gaps not identified during the sales process, potentially leading to adjustments and delays. Another crucial aspect is adequate resource allocation, including human, time and financial resources. Lastly, external factors such as volatile market conditions, unexpected staffing turnovers or unforeseen business disruptions can introduce unexpected challenges to the implementation process. Addressing these potential pitfalls with careful planning and flexibility is essential to integrate successfully.

Donovan: Human errors may be identified from the aforementioned data entry process on private assets. This product class typically requires a lot of clean up prior to import into the new system. It is important to have a partner with a proven track record, training process and familiarity with your business model. This is a big initiative and the payoff at the end should benefit clients, advisers and all supporting staff.

Iyer: When moving to a performance reporting system, it is likely the organization is coming from a manual or semi-manual process. Businesses should use this to improve client interaction and provide new opportunities to clients. The organization should avoid maintaining parallel manual processes that could be migrated to the new system, leading to errors and duplicative costs.

How is a performance reporting system best used to improve an RIA’s operation?

Iyer: A performance reporting system can be a critical competitive differentiator. These systems can improve the ability of RIAs to service their clients by bringing information into one place. They can also make sense of the expanding universe of investments available to investors, including opening up alternatives and private markets opportunities that are typically not available. By incorporating information on clients and the broader markets, the RIA can improve the service they provide to investors, improve their reach and differentiate themselves among the competition.

Donovan: A performance reporting system can be best used to improve an RIA’s operation by streamlining reporting processes, enhancing client communication and improving decision making. By automating reporting tasks, advisers can focus more on analyzing data and providing valuable insights to clients. The system also enables advisers to track and monitor the performance of alternative and hard assets more effectively, helping them make informed investment decisions and optimize portfolio diversification.

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