By Nikola Feliz, CPA, CIPM
I presented a webinar on wrap accounts in October and thought to myself, “What a great topic for our blog!” If you missed our webinar, please log on to www.expertsinthefield.net and listen to the recording. I covered several important topics regarding wrap accounts in my presentation. However, as I walked another new client through the maze of wrap account calculations today, I decided to focus my thoughts here on those calculations.
I remember the hassle firms had to go through in 2005 and 2006 in order to get the records necessary from their wrap platforms. I am happy to say most of the platforms finally came around; however, that isn’t the biggest problem for firms that are shadowing performance on their own portfolio accounting system. Do you know if you are calculating the performance of your wrap accounts correctly?
Knowing how your portfolio accounting system treats fees is crucial for all accounts, but it brings extra challenges with wrap accounts where you have to take into account a bundled fee that includes much more than just transaction costs. Remember, gross returns must still be reduced by transaction costs and if that cost is bundled into the total wrap fee you may find return calculations a bit tricky. For firms that are unable to break out the portion of fees attributed to transactions, they can choose to present supplemental gross returns without transaction costs or forgo gross returns all together. You also have to make sure net returns are net of the entire bundled fee if you are using actual fees to calculate net returns. Any firm working with bundled fee accounts needs to investigate the appropriate system coding. Some systems have a global setting, others may have specific codes that may or may not affect performance. Using the wrong coding could mean your net performance is not calculated correctly. Further, different portfolio accounting systems handle wrap accounts differently. It is important to ensure the coding is consistent with your firm’s GIPS® policies and procedures for wrap account performance calculations.
If you have wrap accounts at your firm and you aren’t sure about your performance calculations, I encourage you to reach out to your verification team at Ashland Partners. We would be happy to discuss your particular situation and help you to ensure the performance you are presenting is appropriate.
GIPS® is a registered trademark owned by CFA Institute.