Accountants tend to think in terms of journal entries and ledger balances. But family principals and their advisors are mainly concerned with investment performance. Investment returns are the result of asset allocation and risk – concepts which are explained later in the handbook.
A single, truly robust investment accounting system is one that can generate requisite analytical reports. To meet that need, the books of accounts should be supplemented with investment tracking ability. This capability should extend to directly as well as indirectly held assets. Investment monitoring should further be backed by asset allocation and underlying risk calculation.
Such comprehensive reporting enables principals to exercise control and ask detailed questions.
The purpose of defining the position of an asset is to facilitate categorization and generation of analytical reports based on those specified categories.
To ‘define’ a position is to tag an investment with its asset-class, sector, liquidity status, country and advisor who recommended or manages the asset. However, such definitions that are assigned by default, may or may not be in line with the investor’s position. For example, an investor may own a few stocks, which are, by default, a liquid investment. But if they are pledged against liabilities, they are illiquid and need to be re-tagged accordingly. Hence the investment accounting system should grant flexibility in tagging and re-tagging investments.
The naming convention of assets is another important aspect for errorless classification of investments. Although instruments such as derivatives and equities come with industry symbols and identifiers (such as Ticker, ISIN, CUSIP and SEDOL), their classification can be varied by the accountants.
A single listed entity also sometimes issues different kinds of securities, such as equity shares, preference shares and debentures. Therefore, the standardized naming system should clearly distinguish one asset type from another.
Correct groupings allow for positions and strategies in the portfolio to be compared to an appropriate benchmark. These facilitate generation of summary and detailed analytic reports.
Defining Advisor and Credit Ratings
Having an advisor master facilitates generation of analytical reports to support review of performance by advisors, ratings and type of equities. For convenience, codes can be allocated to advisors.
A credit rating master maintains a list of fixed income credit ratings from agencies.