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.

To assist independent fund directors in thinking about how best to leverage modern technologies to alleviate operational redundancies, below are some suggestions for how they can best navigate discussions with management and service providers. But first, a quick primer.

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.

Getting the Conversation Started

1. Integration and Simplification
   • How can we integrate our IBOR, ABOR, and CBOR into a single investment accounting engine to streamline operations and create a single source of investment accounting data?
   • Are we employing a multi-book approach that effectively balances the internal management of IBOR and external requirements for ABOR and CBOR?
   • What steps have been taken to evaluate the potential of a cloud-native, multi-book investment accounting solution for our funds?

2. Cost Analysis
   • Have we conducted a thorough cost-benefit analysis of maintaining multiple investment accounting systems versus adopting a unified system?
   • What are the operational costs associated with running redundant teams and systems, and how might these be mitigated by a consolidated platform?

3. Operational Efficiency
   • How does our current investment accounting system impact our operational efficiency, and what improvements can be implemented?
   • In what ways can technology advancements, such as artificial intelligence and machine learning, be integrated into our investment accounting processes to improve decision-making and reduce costs?

4. Vendor Management and Software Licensing
   • Are we assessing the full scope of license fees, support, and maintenance costs associated with our current investment accounting vendors?
   • How can we negotiate better terms or consider a shift to Software as a Service, or SaaS, solutions that can offer all-encompassing support for diverse asset classes and records?

5. Market Data Utilization
   • Are we paying multiple times for the same market data across different systems, and how can we optimize our data vendor relationships to avoid this?

6. Risk and Compliance
   • What are the security and compliance risks associated with maintaining multiple systems, and how can a unified system mitigate these risks?

7. Future-Proofing
   • Is our technology poised to adapt to ever-higher volumes of data, new regulatory guidelines, industry standards such as ESG, and future innovations in the asset management space?

As stewards of mutual fund operations and shareholder value, fund boards must confront the escalating costs and complexities of outdated investment accounting systems. By asking the right questions and advocating for a unified accounting technology approach, they can ensure that the funds they oversee are positioned for efficiency, growth, and competitive advantage in an ever-evolving financial landscape.

Kirk Littleton has been a sales director at FundGuard since early 2021. He has more than 35 years of mutual fund industry experience ranging from business development to product management to pre-sales to implementations. Previously, he was at InvestCloud from 2017 to 2021, where he focused on trading, accounting, and other wealth management solutions sales, and at Ultimus Fund Solutions from 2012 to 2017, where he led business development.