Investment Accounting Technology: A call to Action for Fund Boards

Excerpt from Kirk Littleton’s original Viewpoints article published by Fund Board Views on November 13, 2023.

The world of mutual funds has witnessed a dramatic evolution since the first open-ended fund appeared in 1924. Now, nearly a century later, the funds industry is a diversified ecosystem of asset classes and specialized products. And yet, a key oversight persists in the operational practices of these funds: Many mutual fund companies are paying multiple times for the same investment accounting processes across multiple platforms to support different books of record, asset classes and jurisdictions, leading to excessive costs that impact both the asset manager and the shareholders.

These redundancies are the result of today’s fund managers and their service providers having to navigate through a complicated maze of legacy investment accounting engines. This array of systems— often designed decades ago to handle different books of record, asset classes, and jurisdictions—introduces redundancy that escalates operational burdens and costs as the industry scales.

A Costly Tech Redundancy

Fund board members should be cognizant of the challenges related to these redundancies because they directly influence the total cost of ownership and the efficiency of fund operations. As fiduciaries, independent fund directors should engage in proactive oversight and ask critical questions to ensure that their investment accounting systems are cost-effective, efficient, and up to date with current technology standards.

The common books of record in the investment accounting process include the Accounting Book of Record (ABOR), Investment Book of Record (IBOR), and Custodian Book of Record (CBOR).

Mutual fund managers require detailed and current data for trading, compliance, performance calculation, and risk analysis; this is where IBOR comes in. For daily net asset value, or NAV, calculations and financial records, the manager relies on ABOR, which most often is managed by an external custodian. Finally, a mutual fund manager must work with custodian banks to maintain CBOR for asset safekeeping and cash tracking.

With all this necessary information and data, the typical fund manager is often left with three books of record for the same mutual fund portfolio—books that must sync up at the end of the day so that processes like reconciliation can take place with accuracy and timeliness. This amounts to a tremendous amount of work to not only maintain each book independently, but also to reconcile an IBOR to an ABOR, and then the ABOR to the CBOR.

To assist independent fund directors in thinking about how best to leverage modern technologies to alleviate operational redundancies, we have created a list of suggestions to better navigate discussions with management and service providers.

Follow this link to Kirk’s original piece in Fund Board Views to read our suggestions for how best to start the discussion.