By Jeremy Langlois, the CRO of Mirador.
In recent years, investors have shown a heightened interest in alternative investments, driven by their desire to attain substantial returns with reduced exposure to market risk and the high volatility typically associated with publicly traded stocks. Despite this trend, investors still confront significant data-tracking, reporting, and auditing challenges, which can put them at risk of regulatory issues or missed investment opportunities. These complexities can quickly become overwhelming. Here is where the industry is evolving, as technology and associated support services are stepping in to address these challenges, bridging certain reporting gaps and opening new opportunities for optimizing portfolios.
Where do the reporting problems start?
Alternative asset reporting is a nuanced endeavor with data collection, processing, and utilization challenges. Looking closer, several areas create pain points, increasing the potential for missed opportunities and decision-stalling for investors and their wealth management teams.
I. Data quantity and lack of uniformity
The complexities in tracking and managing alternative investments start with the avalanche of data that needs to be processed. Alternative investment data can be delivered from various sources, such as custodians, specialized alternatives platforms, or directly from fund managers. This translates to data lacking uniformity, subject to its originator. Additionally, alternatives are commonly invested by wealth manager discretion or directly through fund managers, creating even more complexity in the type of data that needs to be tracked. This is a complicated endeavor for wealth managers and their teams, who rely on manual human efforts to aggregate the right data from emails, pdfs, portals, and other formats and then process that data further downstream.
II. Data Schedules and the human element
Creating uniformity in reporting for alternative investments is a challenging endeavor. There currently isn’t a catch-all solution. Aggregating data for alternatives with less uniform fiscal schedules is difficult and time-consuming. Combining liquid custodial data with alternative assets into a cohesive report requires a thorough understanding of the transactions and performance metrics that drive the analysis and ultimate decision-making. This, too, is a labor-intensive manual process subject to human errors requiring further careful auditing. Overwhelmingly, current alternative investment reporting practices rely on manual labor and is thus time-consuming and expensive, fraught with extra steps necessary to ensure accuracy and reconcile unavoidable human errors. Moreover, teams within the same organization often create their own reporting frameworks, resulting in redundant overlaps and a lack of uniformity.
III. Data nuances
Another problem is accurately tracking capital calls, distributions, and related capital account statements. When advisors track alternative investments outside of a portfolio accounting system or other software, it can hinder accurate reporting due to the inability to capture the nuances of different transaction types. For example, alternatives often involve different distributions, like generic (short and long-term) or return of capital, each being either recallable or non-recallable. Even more tracking problems are encountered with system drawbacks that limit the information necessary to accurately report it (i.e. netted transactions or broad characterizations). Reporting on alternative investments requires a broader range of transaction events to ensure accurate performance reporting, especially for private equity, hedge funds, and real estate investments.
Is there a better way of reporting alternative assets?
There is! By adopting a technology-enabled and human-driven approach, reporting uniformity, agility, and efficiency can be achieved. Technology alone is not a magic solution. It is a valuable tool that can improve the reporting process, but only when paired with human talent, which can more adequately inject nuanced discernment into the augmented reporting activities and the output results. For enhanced reporting, a balanced approach must be instilled that elevates the human element, promoting transparency and efficiency throughout the process. Technology helps that process by unifying the process, removing some of the blind spots, and removing friction points. We are still in the early stages of transformation, but there is an opportunity to embrace change and improve the existing reporting operations.
About the Author:
Jeremy Langlois joined Mirador as a Partner in 2016. As Chief Revenue Officer he oversees all business development. Langlois is a subject matter expert in financial reporting solutions and leverages today’s best-in-class financial technology solutions to provide Mirador clients with premium reporting solutions and exquisite service. Until recently, Langlois also balanced his responsibilities at Mirador with a demanding professional hockey career of five years. Prior to joining the firm, Langlois worked at Credit Value Partners, where he analyzed high-yielding and opportunistic debt investments in private corporate debt. Langlois received his B.S. in Finance and M.B.A. from Quinnipiac University. Outside of Mirador, Jeremy values giving back to the community, coaching a local youth hockey team, and spending time with his wife Erica, sons Owen and Jack, and dog Duke, an English Cream Retriever, who is the mascot for “Team Mirador.”
