First published by Family Wealth Report on by Doug Fritz, CEO at F2 Strategy.

As a companion to our December 2019 article on Performance Reporting systems, this month’s article focuses on General Ledger Accounting Systems that provide insight into the non-investment side of the financial equation.

Accounting systems should succinctly answer and furnish details to support core questions pertaining to current value and changes in financial position including:

  • What is my net worth?
  • Where am I spending the most money?
  • What do I own and what do I owe?
  •  What is my asset allocation?
  • What are my realized gains/losses?  
  • What is the tax basis of my investments?

The completeness, quality and clarity of financial accounting and reporting instills confidence in how a client’s wealth is being managed and provides a sound basis for credible decision-making.

Accounting systems vary widely in functionality.  As technology becomes more sophisticated and less expensive and industry requirements change, the range of functionality and services vendors offer has become broader.  

We hope that the following analysis will provide a framework for assessing and selecting the right accounting solution for your firm.  

What are the characteristics of best-in-class General Ledger Accounting Systems?

Below are the criteria we use in our practice to evaluate General Ledger Accounting solutions.

Solutions are evaluated across a range of competencies including:

  • Data Aggregation / Reconciliation  
  • Flexibility
  • Integration and Scalability
  • Reporting
  • Digital Access
  • User Support
  • Sustainability

Data Aggregation and Reconciliation

To provide complete financial reporting, ALL assets and liabilities need to be included regardless of their type, where they are held, or in what currency. Unlike performance reporting solutions that focus on the investment side of the financial equation, accounting systems need to include the value and transactions associated with each and every asset and liability held in order to form a holistic view of the what is owned and how and why the value of those holdings has changed.  Because of these requirements, the data aggregation process is more complicated.

Direct Feeds

Ability to receive and process data electronically provided by custodians and financial institutions.  Basic files include positions, prices and transactions. The better institutions provide daily tax-lot data including cost basis and realized and unrealized gains.  Unfortunately, the data provided in direct feeds only covers a portion of what is necessary to prepare holistic financial reports.  Data must be gathered from additional sources using alternate methods.

Data Uploads

Ability to manually enter or upload valuations and transactions to update held away assets (e.g. hedge funds, limited partnerships, unique assets) through an efficient, scalable process. The ability to selectively block data for duplicative assets held at custodians is also important.  

Third-party Aggregators

Although some financial institutions do provide the ability to export data, too often they do not provide direct feeds for certain types of accounts including checking, savings, mortgages, retirement plans, education plans and credit cards. In these instances, employing a third-party aggregator (e.g. ByAllAccounts, Plaid) although not perfect, eases the burden of manual entry.

Reconciliation

At minimum, the solution should provide an automated interface to reconcile positions, values, and transactions between the system and institutional statements and records.  Because aggregation can be complex and burdensome, more vendors are providing aggregation and reconciliation as a service.

Flexibility

Because the needs, requirements and interests of each client differ, the ability to build a custom chart of accounts, bespoke transaction types and asset categories is a requirement of a competent Accounting system.  In addition to generic categories, specific categories may be necessary to detail the effects of unique activities including those related to partnership investments, private placements, residential properties and personal collections.

Although the system should accommodate a high degree of customization, it should also be configured to adhere to the accounting principles of various legal and tax jurisdictions to simplify reporting to third-party entities.

Integration and Scalability  

One of the greatest inefficiencies UNHW firms face is duplicative data entry.  This is not only a wasteful expenditure of time but is often the source of disconcerting data discrepancies.

General Ledger Accounting isn’t a stand-alone solution but rather an integral component of a technology ecosystem.  Leading accounting systems either incorporate or integrate with other systems to eliminate double entry and to optimize scalability.  Popular integrations include data aggregation services, bill pay services and performance reporting solutions.

The system should also have the ability to automate transactions between related positions and assets.  For example, principal payments on intra-family loans should simultaneously affect both the value of the asset held by the lender as well as the liability of the borrower; contributions to private equity investments should simultaneously affect the cash balance, the value of the investment and the amount of unfunded commitments.

Reporting

Financial Statements

Reporting capabilities include the configuration and production fundamental financial statements such as:

  • Balance Sheets to provide a holistic view of assets and liabilities across all account types, asset types and currencies.
  • Income and Expense Statements to detail and summarize income and expense transactions to support decision making including the ability to identify spending patterns and to estimate tax liability.
  • Cash Flow Reports – to summarize cash related transactions to identify and quantify the sources and uses of cash to analyze the long-term sustainability of wealth.
Dashboards

Portfolio accounting systems contain a depth of valuable data that can be difficult to assimilate and comprehend.  The ability to distill position and transaction data into simple, comprehensible reports for analysis and decision making is essential. Sophisticated systems provide a wide variety of reports combining tables, charts, and graphics to resonate with clients’ needs and their required level of detail.

Partnership Reporting

Wealth ownership structures can be complex making it difficult to track and report on multiple entities across generations. These ownership structures require the ability to produce reports that provide complete transparency and granular visibility into the components of the family structure and their ownership interest in family entities.

Digital Access

The appetite to access current data is insatiable.  Use of the internet and particularly mobile devices to access information continues to surge.  Providing on-line access to data is not an option, it’s a necessity.  Digital capabilities should include:

Curated Content

Ability to create custom content and to select what content to share with each client.

Engagement

Ability to select custom date ranges, drill-down to greater levels of detail and export data.

Visualization

Ability to employ graphics and charts that relate current net worth and changes of net worth at a glance.

Bill Pay

Ability to pre-approve vendors, set dollar limit thresholds and approve or reject invoices for payment.

File Sharing

Ability to share reports and documents in a secure environment.

User Support

The level of service each provider provides is a differentiator.  Service should be continuous from implementation, adoption through on-going support and education.  The service offering should include:

  • Experienced resources to lead conversion from legacy systems (including historical data conversion).  
  • Ability to develop operational workflows to ensure data integrity and to support user satisfaction and adoption.
  • Ability to address routine issues and questions quickly and accurately.
  • Ability to provide on-going education and training for new users and to support new functionality.
  • Due to the critical use of data in both decision making and tax reporting, the provider should have demonstrated experience with accounting principles and tax strategies.

Selecting the right level of service can be tricky and often not taken seriously enough. Often the costs associated with higher levels of service (if these are negotiable) are avoided to save money.  In our experience, this is almost always a long-term source of frustration.  The vast majority of firms that have opted for higher levels of support and service feel that money was well-spent.

Sustainability

Many providers have their roots in single or multi-family offices and are supported by a small number of large clients. They may have limited access to capital or may be relying on unrealistic growth projections to fund their existence. A prolonged market correction may have serious consequences for many of these firms.  A best-in-class firm should have:

Cadence of Innovation

Firms need to fund their own progression and not rely upon their clients to pay for incremental changes.  

Client/Vendor Partnership

Best in class firms will have a who’s-who of happy clients that are willing to act as ambassadors for them.

Financial Stability

Especially critical going into 2020 (and a possible downturn) to always know who is funding a firm and what they intend to (or have shown a track record for) do with the firm in the coming years.  Firms with a numerous and deep client base have a better chance of survival.

Well-Federated Knowledge Base

Many firms (even those with hundreds of employees) may have only one or two experts that really know how the tools work.  Ensuring these employees are well-paid and incented to remain there is critical.

Notable Trends  

In response to an increasing market demand for a sophisticated integrated solution, technologies are converging.  For example, accounting systems are developing more sophisticated performance reporting components and performance reporting systems are exploring integrations with leading accounting solutions.  We’re not sure where the convergence will lead, but a solution that allows clients to choose best-of-breed systems to provide an optimal solution might best serve the industry.

There is an apparent functionality gap in the ability of accounting systems to more than partially integrate with tax preparation systems. Data accuracy and the specificity of tax regulations make integration challenging but the inefficiency and cost to prepare returns is driving clients to require technology to develop a solution.  This is gap is an opportunity for developers.  

We have observed a critical divergence in the market’s perception of technology between single and multi-family offices.  SFOs continue to largely see technology as an expense which must be mitigated while MFOs see technology as a driver of growth and a critical differentiator.  It is hard for us to see a future where SFOs are able to realistically keep up with the expectations of future generations.  Many of our MFO clients and contacts see this divergence as ample cause to increasingly invest in some of the top technology on the market.

Closing Thoughts

In the end, “high” marks are incredibly subjective and rely on unique perspectives and objectives.  What features and capabilities that are critical to some may not be important to others.  

Some questions that may help you to shape your decision:

  • What types of investments need to be covered? (liquid, illiquid, unique, foreign)
  • What types of entity structures need to be supported?  (trusts, foundations, limited partnership, family entities)
  • What tax authorities need to be supported? (federal, state, foreign)
  • What types of reports and data need to be available for whom, when and how?

Getting the right expert advice to assist you in making the correct decision is critical because getting it wrong can cause a significant disruption in your business.