Best practices for compliance and continuity

Data conversion in a system migration

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Getting a new portfolio management system always requires some data conversion, but the process is not nearly as onerous as many believe and the benefits of greater efficiency typically far outweigh the cost and effort of converting data.

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2 | Data Conversion in a System Migration

Investment firms are always looking for opportunities to increase efficiency and effectiveness. In spite of the financial crisis—and in some cases, because of it—many firms are continuing to invest in new technology solutions to further reduce risks, become more efficient and control costs. A recent survey by the Advent Users Group and the Investment Adviser Association found that a majority of firms surveyed expected to increase their IT investments. For these firms, a “migration to quality” is seen as a means of mitigating the impact of market volatility.

Portfolio management systems, whether in the form of an onsite installation or a fully outsourced hosted solution, continue to evolve toward greater efficiency. At most firms, the portfolio management system is the core of the investment operation. Migrating to a new one, particularly to a new provider, is a significant undertaking, but the potential efficiency gains and cost savings should make it worth the effort.

Still, firms are often reluctant to change systems, despite the opportunity for process improvement, when they confront the issue of converting data from their current system to a new one. The

general perception is that the process of data conversion is long, daunting, and potentially costly. Firms are concerned about disruption in client service, and regulatory requirements are unclear. Many firms mistakenly assume that the only sure way to remain in compliance is to bring all their data, including historical client data, from the old system to the new one.

The concern is often sufficient to cause a firm to cancel or defer its plans to change systems—which means missing out on the opportunity for improvement and ceding an important competitive advantage.

A Targeted Approach

Fortunately, and surprisingly to many firms, the SEC does not require firms to convert their full transaction history when changing systems. Specific details of every buy and sell or the movement of cash and securities into and out of accounts can be maintained offline.1 So despite what many firms mistakenly believe, an “everything but the kitchen sink” approach to data conversion is not required, or even advisable in many cases, when migrating to a new portfolio accounting system.

The good news is: It's not as bad as you think.

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1 With regard to the SEC’s recordkeeping requirements for performance advertisements, under Rule 204-2(a)(16), the required supporting records must be maintained for not less than five years from the end of the fiscal year in which the advertisement was last published or otherwise disseminated, the first two years of which should be in an appropriate office of the investment advisor.

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The challenges of data migration should not deter a firm from exploring new technology solutions.

4 | Data Conversion in a System Migration

Instead of doing a blanket data conversion, firms should first consult with the Chief Compliance Officer to understand the firm’s record retention policies, work with their technology providers to determine any reporting and continuity requirements, and perform a targeted conversion of only the data required to support their actual business needs. This approach keeps the scope and costs of conversion manageable and results in a smoother transition.

This document is designed to help firms understand their data conversion options. It will outline:

> What data is critical and must be converted for compliance and business continuity purposes.

> What data is not deemed critical, and available options for addressing it.

> The relationship between data conversion and reporting.

> What to look for in a new technology provider relative to data conversion.

The inherent challenges of data conversion in a system migration are not

insurmountable. They certainly should not deter a firm from exploring new technology solutions when it becomes apparent that the current system is not sustainable for the long term. Understanding data conversion will enable you to ask more specific questions and make a better informed decision on a new accounting platform and technology provider.

Identifying Critical Reporting Data

Converting historical client data is not impossible, but firms must ask themselves how much is truly necessary. The more components of data you try to bring over from the old system to the new one, the more prolonged the conversion process and the higher the costs. And, because different portfolio management systems use different databases and offer different reports, a firm might go through a painful and expensive conversion and still not get the reporting capabilities it was expecting.

The key is to understand the relationship between data conversion and reporting. A portfolio management system essentially

has two components: a database and a report engine that queries the data in the database in order to generate reports. Only certain reports require historical data. The question to ask, therefore, is: what reports are essential for your specific business needs, and which of those reports will require historical account data?

Judging from significant system implementation and data conversion experience, most firms require two basic report types that necessitate a data conversion in order to run reports that draw on an account history:

> Time-weighted rates of return

> Current open tax lot information, with original cost and purchase date

Cost basis information enables the firm to run appraisal reports as well.

In most cases, these reports are sufficient from a compliance and business continuity standpoint. Performance history data enables a firm to continue to provide account returns as a service to clients. It also helps demonstrate consistency in performance calculations in the transition

Despite what many firms mistakenly believe, an “everything but the kitchen sink” approach to data conversion is not required, or even advisable in many cases, when migrating to a new portfolio accounting system.

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from one system to another, if necessary for compliance purposes.

Ask your prospective technology providers about their experience in converting the data needed to run these types of reports. A qualified implementation team should have the expertise, tools, and a proven process for extracting the relevant data without bringing over extraneous account information.

Firms may have reporting needs above and beyond those cited that require historical data. Discuss your particular reporting needs with your prospective technology provider. They should be able to tell you which reports require historical data—and which data those reports require. The point is to start from the perspective of your business needs and work back to identify your data requirements, instead of assuming you need to bring all your old data over “just to be safe.” And remember, just because data is not converted does not mean it is unavailable. It is simply housed in a different system and can be retrieved if ever necessary.

Transaction History: What Is the SEC Looking for?

The SEC is accustomed to firms changing systems and, as noted earlier, does not require or expect every historical trade detail to be migrated to the new system. To the extent that examiners are interested in transaction history, they will be more reliant on third-party documentation than on a firm’s own records. Investment firms are required to maintain custodial records, which contain all the historical transaction detail required.

A key area of focus during an SEC inspection is on advertisements and performance figures used in general advertising or one-on-one presentations. Under Rule 204-2(a)(16), an investment advisor must keep all performance advertisements and all documents necessary to form the basis for that performance information. This requirement can generally be satisfied with account statements, if they reflect all debits, credits and other transactions in a client’s account for the period of the statement, and all worksheets necessary to demonstrate the performance

calculations. These supporting records must be maintained for not less than five years from the end of the fiscal year in which the advertisement was last published or otherwise disseminated.

Although compliance with the Global Investment Performance Standards (GIPS) is not an SEC requirement, it is increasingly regarded as a de facto industry best practice globally. If a firm claims compliance with the GIPS standards, it must also adhere to the GIPS Guidance Statement on Recordkeeping Requirements. The guidance requires firms to support both portfolio and composite performance calculations for all periods of performance the firm is showing. This necessitates not only individual account time-weighted returns, but also the market values that were used for weighting account returns in the composite.

“Trying to populate a new system with massive amounts of historical data is counterproductive. Get what you need and move forward.”

—Kimberly Cash, Ashland Partners

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Dealing with Historical Data

None of this, however, requires the conversion of detailed transaction history to the new system. What, then, should you do with it? The Investment Advisers Act of 1940 states that the records “may be maintained and preserved for the required time by an investment adviser on:

(i) Micrographic media, including microfilm, microfiche, or any similar medium; or

(ii) Electronic storage media, including any digital storage medium or system that meets the terms of this section.”

In the latter case, there are a number of storage alternatives available, including onsite or offsite server-based data storage systems or online, hosted storage services. Your technology provider should be able to advise you on the data storage and retrieval option best suited to your business needs.

As summed up by Kimberly Cash, a partner at Ashland Partners, a leading GIPS verification compliance consulting firm,

“Capturing and storing massive amounts of

data from an old system in a retrievable format is doable. Pros and cons depend as much on the firm’s culture as on regulatory requirements—there are some packrats among us. That said, trying to populate a new system with massive amounts of historical data is counterproductive. Get what you need and move forward.”

Collecting and Preparing Information for Transition

From a practical point of view, collecting and compiling the necessary data gener-ally ends up being more complicated than anyone would like it to be. Most estab-lished portfolio accounting systems have a function to export underlying data from databases where the information is stored. When possible, it is preferable to use exist-ing export functions, but when that is not an option, converting reports into text or Excel files is the next best option.

Prior to collecting data and reports you should feel comfortable that the information is as “error free” as possible. Errors become more complicated to correct once the returns and market values

are no longer derived from the underlying transactions and security prices. Here the old adage “an ounce of prevention is worth a pound of cure” cannot be over-emphasized.

Once the data is collected it will need to be formatted so that it can be input into the new portfolio accounting system. Each system, as it is set up, will be based upon the user’s needs and version of the software. Working with someone familiar with both the availability of data from the previous system and the needs of the new system will help smooth out the process. If you are planning on doing this on your own, your technology provider will be your biggest ally in finding out exactly what is needed and the format it needs to be in.

Start from the perspective of your business needs and work backwards to identify your data requirements.

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The last component to the conversion process is to have the end users become comfortable with maintenance and reporting. There is nothing more frustrating than completing a conversion and not knowing how to use the new system. You will need to take the time to train all users so they understand where to get the information they need to fulfill their job functions.

Evaluating Expertise: What to Look for in a New ProviderAs you begin to review new options for portfolio accounting, remember that you are not only evaluating systems, but also the companies behind them. Can the provider migrate your firm effectively to the new solution, including the conversion of the essential data you need for business and service continuity as well as for compliance?

A prospective technology provider should take the time to discuss your business needs and make a recommendation as to which data should be converted to support

Managing the Conversion Process

The most important recommendation would be to get the new system functioning before discontinuing the old system. After the historical data has been incorporated into the new system, the next step is to streamline the flow of present data into the system. It may also be necessary to take into account differences in accounting practices pertaining to accruals of income, management fees or other incomes/expenses.

The best practice would be to run both systems in parallel and compare results for any unexplained differences or unexpected results. Firms find themselves needing to change systems at all times throughout the year, but due to some requirements for GIPS-complaint firms it would be best to make the transition so that you have a full year on each system. Running both systems in parallel for the fourth quarter allows bugs in the new system to be worked out, so by the first quarter of the next year everything can be in place.

your specific requirements. That means asking you the right questions: What are your day-to-day business requirements? What reports do you need for clients? For internal management?

The people overseeing the migration should have significant experience in converting data for investment firms. They should know the SEC and GIPS compliance requirements and recommendations, and help you distinguish between “nice to have” and “need to have.” They should also have a proven methodology for converting essential data, as well as a dedicated data conversion team with experience in similar implementations.

Data Conversion and Reports Matrix

Type of Data Reports Affected Effort/Cost to Convert Critical to Have?

Performance HistoryHistorical performance (TWRs) including reports that compare portfolios to indices, Internal Rate of Return reports (IRR), target allocation reports

Low Yes

Cost Basis Portfolio Appraisal, Unrealized Gains and Losses, Portfolio Summary and Target, Portfolio Diversification, Portfolio Summary Low Yes

Composites and Group Performance Performance history reports (IRR and TWR) Medium Yes, if the firm markets

composite returns

Buy and Sell ActivityTransaction Summary, Purchase and Sale including reports that compare groups and composites to indices, target allocation reports

High No

Income/Expenses Income and Expenses High No

Prices Historical Price Summary, Historical Appraisal (price snapshots on a specific date) Medium No

Customer Relationship Management (CRM)

None High No

8 | Data Conversion in a System Migration

A prospective technology provider should take the time to discuss your business needs and make a recommendation as to which data should be converted to support your specific requirements.

The last component to the conversion process is to have the end users become comfortable with maintenance and reporting.

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One Advisor’s Experience: Communication is Key

Arizona-based RIA firm Alpha Fiduciary Generational Wealth Management recently switched portfolio accounting providers. Communication with the new provider is the key to a successful data conversion, says firm founder Arthur Doglione. “They took the time to see exactly what our data looked like, so they could tell us whether we could get it converted to where we could use it. We didn’t want to go from showing a time-weighted return number to a dollar-weighted return number simply because we lacked the appropriate data,” he says.

“There was a very clear understanding on both our parts how much work was involved,” Mr. Doglione recalls. “We provided them with month-end data for every client for every month so they could put it in the proper format, and we were up and running in a matter of two weeks with an uninterrupted performance report.”

A prospective technology provider should take the time to discuss your business needs and make a recommendation as to which data should be converted to support your specific requirements. Feel free to shop around and interview various providers to make sure you find one whose approach aligns with your needs.

Moving Forward with Confidence

The transition to a new portfolio accounting system is not simply about having the latest technology. Many firms see it as an opportunity to review and improve workflow processes, streamline operations, align with industry best practices, and strengthen efforts to retain and attract customers. The challenges of data conversion should not hold you back from realizing these advantages.

It is neither practical nor necessary, from either a business or compliance

perspective, to convert all historical client data to a new system. There are several options for dealing with legacy data based on your anticipated needs. With expert guidance from an experienced technology provider, you’ll be able to identify and limit the conversion to the specific data you need to meet your business requirements. That allows for a faster and less costly transition with minimal disruption, and enables you to start reaping the advantages of a new solution right from the start.

Make it happen

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