I meet with prospective clients on a regular basis that do not trust their returns. In the more than 20 years of processing and validating performance data for clients, we have seen our fair share of inaccurate returns and what causes them. I have met with large teams of analysts and back office staff who are exhausted from playing catch up, responding to numerous inquiries into return issues, and who are looking for help. Just throwing more people at the problem rarely helps but taking a systematic approach can yield significant long-term benefits and efficiency.

Do you not trust your returns? If not, I suggest you consider investigating the following areas:

1. No Proactive Review Process. Perhaps the worst of them all. Here are just a few of the most common validations that help prevent inaccurate returns.

• Do you check for returns which vary from market benchmarks or the price return of the underlying securities?
• Do you have a team of performance experts who proactively reconcile shares, units, and cash balances each month before reporting?
• Do you check for missing accruals, prices or unclassified assets?
• Do you proactively review the performance effect of corporate actions
• Do you check for invalid or new transaction codes or security identifiers?

2. Corporate Actions. Without fail, this is the leading cause of performance inaccuracies. The challenge you ask? It’s because there are many types of corporate actions and often there is only one transaction code for corporate actions. A spin-off has a very different effect than a name or CUSIP change. Here are some questions to consider:

• Does the spinoff occur the same day as the price change of the security?
• Is the spin-off transaction creating a flow?
• Are the old and new security classified the same?
• Is there a valuation of the old and new asset?

3. Free Receipt/Delivery Valuations. How you value assets received and deliver out of your accounts can have a big impact on your performance.

• Are my receipts/deliveries valued at all?
• If they are, is the cost basis or the market value used?
• Do you receive the accrual owed upon receiving fixed income assets?
• Do you deliver out the accrual earned on delivering fixed income assets?

4. Generic Transaction Codes. Unfortunately, there are many types of contributions, distributions, and income transactions. Many accounting/custodial systems use the same code for many types of transactions.

• Income – Are you differentiating capital gains vs. other types of income?
• Contributions/Distributions – Are fees treated as distributions? Is income being counted as contributions?
• Corporate Actions – See above point! Do corporate actions have a different code than receipts/deliveries?

Marshall Smith( EVP, Services )

Marshall Smith CIPM, EVP of Services, has been with First Rate since 2006. You can follow Marshall on Twitter @MarshallCSmith, or connect via LinkedIn.