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4 MIN READ
INVESTMENT OPERATIONS

A New Solution: An Insider’s View of the Decision Process

A New Solution: An Insider’s View of the Decision Process

INVESTMENT OPERATIONS

This article is a chief investment officer’s story of switching investment accounting systems, from impetus through implementation. I was the CIO of an insurance company that recently worked through this challenge. I hope that by sharing my experience, I can help you with your decision. Most importantly, I disclose what I would do differently with hindsight.

The Status Quo

Like many insurers, we were making the current system work. We had 1.5 investment accountants with a decent amount of experience on a legacy system. Bonds were built on the system. Our workaround for commercial mortgages was to structure them as mortgage-backed securities as a separate “company” on the system. The private equity and hedge funds were usually tracked in a spreadsheet. In short, it was not perfect, but it was working. 

Why Change?

So why change now? Technology is one of those things we tend to nurse along until it is completely broken, then perform an emergency organ transplant. It is better to look to future needs and make sure the system can handle growth, new asset classes, multiple entities, and play well with other software. We put off technology changes because most of us are technology users, not developers. We are at the mercy of the technology gurus and are relegated to the position of chief complainers, not fixers. 

Our primary complaints were as follows:

  1. Inability to see accounting data without requesting a report from our investment accountant. Not only was the existing software difficult to navigate for the occasional user, it also cost a few thousand dollars for each desktop – for that reason, we were limited to only two users. Our investment accountant would pull requested data from the system and send it to the CFO, CIO, internal auditor, or tax accountant. We would then look at the report, inevitably remember we needed another column, and ask again. The process was inefficient for the accountant and for the end users. 
  2. Lack of a holistic view of the portfolio. No system aggregated all the asset types and all the managers. Furthermore, different systems (limited partnerships, for instance) had different fields and could not be aggregated in a straightforward way. We had to cobble together statements and reports from various places to estimate overall cash flows and duration of the aggregated portfolio.
  3. Key person risk. Our capable investment accountant was great, but what if she was no longer there? Our operational processes were dependent on the unique and esoteric knowledge of a single person. For other firms, controls may be of equal concern: how can you ensure accuracy and absence of fraud?
  4. Errors in accounting for new types of investments by our existing software provider. We had to restate financials due to an error in calculating ETF systematic value. True, this was a new statutory accounting procedure, but isn’t that the kind of industry-wide change our investment accounting software provider is supposed to be prepared for? 
  5. Slow response time on questions and needs. We could not call our existing provider and get a human to pick up the phone. Instead, we had to file our issue and wait (usually 24+ hours) for a response. This was frustrating from a customer service perspective, and also introduced operational risks when new challenges or needs arose.
  6. Insufficient report writing ability. We were told we could take classes or pay for the vendor to help us build reports. Report writing that could be used in presentations and board packets was not easily available.

Fear of the Unknown

That is a sizable list of complaints. So, why didn’t we feel the urgent need to change? 

Because fear of the unknown is greater than fear of the known. What if the new system did not live up to its promises? Our accounting area prided itself on timely, accurate reporting. What if we could not get our statements out on time? 
Clearwater answered: “Let us prove it to you. If you don’t like what we show you, then you can stay with your current provider.” That seemed like a low enough risk to give Clearwater a try.

Giving Clearwater a Try

By way of a thorough evaluation, Clearwater proved itself a better investment accounting solution, overcoming the complaints listed above. After a lot of work by both parties, the transition was completed and Clearwater became a part of the team.

Five Best Practices for Implementing Clearwater

If you are considering a change, please learn from my experience. The pieces of advice I gleaned from other Clearwater clients were invaluable and saved my team time and headaches.

  1. We sometimes speak different languages. Define a common vocabulary between you and your implementation team. Just because everyone in your firm speaks the same language, do not assume it is ubiquitous in the industry. When Clearwater said “amortization” I thought of a bond scheduled principal repayment schedule. Clearwater thought of statutory accounting amortization of purchase premium or discount. Other terms that required consensus included: factor, sector, rating, mortgage. 
  2. There will be hurdles. Set appropriate expectations. Why is it that projects typically run over in time? We are very poor forecasters when it comes to unknown events. We know how long things take if all goes well, but no complicated project happens without some unforeseen snags. Somebody gets sick, the electricity goes out in the building for a day, or another project bumps your attention for a week. Make sure your expectations are realistic, and appropriately set the expectations of your team. 
  3. Implement during the first half of the year. Get your ducks in a row early. It is cumbersome backfilling a year’s worth of transactions, so try to switch systems early in the fiscal year or be open to discussing what timeline makes sense for both your firm and Clearwater.
  4. Check your existing contract terms. A common practice of legacy providers is to have long contracts with long and formal cancellation provisions. Check the details now to inform your decision dates and deadlines.
  5. Don’t expect Clearwater to read your mind. Reiterate your primary pain points. Make sure Clearwater knows if you really want (for instance) the Income Forecasting tool early on, or if CMBS IO amortization is a key fix for your organization. Work with your Clearwater team to stay hyper-focused on your priorities. Clearwater’s solution solves pervasive industry challenges, but it is highly configurable to the particular needs of each client.
  6. Be good to your staff. They are most likely doing most of the implementation work, plus their old jobs. They are also the ones skilled enough to catch nuanced differences between systems and point out potential problems.

An Extension of Your Team

When you consider selecting Clearwater, it’s important to think of them as a partner, not simply a vendor. Yes, you are selecting innovative, automated technology to help you scale; you are also adding expertise and operational knowledge to your core team. And those experts are always a phone call away.

Tearing off the band-aid now helps you trust that you have technology in place that will improve operations not just today, but for years to come. Taking that first step into the unknown cracks open the door to more complex asset classes and paves the way for the seamless implementation of new regulatory guidance. 

Making the change now means your team and systems will be prepared.

If you would like to learn more about the Clearwater solution and see a demonstration of the system, contact a Solutions Consultant today.

Lisa helps guide the ongoing development of Clearwater’s insurance-specific solution and services.

Lisa has provided executive-level leadership to investment teams at two top-rated insurers. Prior to that, she was a portfolio manager over general account assets for more than 18 years. Her vantage as an industry leader and influencer is exceptionally valuable to Clearwater as the company’s product, development, and client servicing groups identify and pursue the most critical solutions for investment teams worldwide. 

Lisa is also the governor-appointed Chairman of the Investment Board of Iowa Public Employees’ Retirement System. She has set asset allocation, risk tolerance, and investment assumptions for the $35 billion public pension portfolio.

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