May 6, 2019  |  BLOG POST |

The following article appeared in the 2019 Mutual Fund Service Guide, Transfer Agency Section, page 34 published by SourceMedia, Inc.

By Brian Jones

Alternative assets have gone mainstream and are poised to keep growing in the coming years. By 2025, alternative assets could represent some 15% of global assets under management, estimates PwC—double their share in 2017.[1]

For recordkeepers, the growth of alternatives brings some thorny challenges. Unlike “classic” investment vehicles, most of which share basic conforming features that fit established recordkeeping patterns, alternatives vary widely. What’s more, those variations aren’t neatly categorized. So, it’s not enough to create a workflow for, say, private equity assets and expect all products to fit neatly into that pattern. Even when individual products are variations on a familiar theme, they may have one or two—or ten!—specific features that need special attention.

And from a practical perspective, what does that mean? You probably know the answer already. It means spreadsheets.

In today’s day and age, no one should handle recordkeeping using spreadsheets. To do so is inefficient and error-prone—and of course entirely impractical, apart from the very smallest products.

Yet with alternative products, spreadsheets are par for the course. Even large, highly sophisticated recordkeeping organizations rely on them for certain aspects of their alternatives business.

And it’s no wonder why. Think about why anyone uses spreadsheets at all: they are utterly flexible, yet still provide process formalization. For skilled users, they offer advanced mathematical functionality, while still enabling end-user access to both functions and data. Perhaps most importantly, spreadsheets are ubiquitous. They are the ultimate common platform in any financial-services environment. They provide an easy-access solution to almost any documentation need—and, once documented, information can be readily passed along to the next person in the chain.

As one consortium of academic and industry experts observed, “…spreadsheets will always fill the void between what a business needs today and the formal installed systems….”[2]

So, for a recordkeeper needing to handle a product twist, turning to spreadsheets is perfectly, but dangerously, natural.

A simple truth is that once a spreadsheet has been reviewed, there is limited, if any, further auditing of it, and the output is considered gospel. Most of us are familiar with some horror stories about spreadsheets, in our own experiences and even in the media, where spreadsheet errors have factored into incidents of trading losses and restatements of financial results.

It might be tempting to think that so long as a sound quality-control system is in place, such problems are avoidable. Or, it might be inviting to think errors of consequence are only likely with complex spreadsheets containing many (or even any) functions.

But research has consistently shown that’s wishful thinking. Hidden errors, inaccurate user entries, unwanted adaptations, turnover in personnel—all these and more are constant risks in any spreadsheet-based system. University of Hawaii’s Raymond R. Panko summarizes the problems:

“Research on spreadsheet errors is substantial, compelling, and unanimous. It has three simple conclusions. The first is that spreadsheet errors are rare on a per-cell basis, but in large programs, at least one incorrect bottom-line value is very likely to be present. The second is that errors are extremely difficult to detect and correct. The third is that spreadsheet developers and corporations are highly overconfident in the accuracy of their spreadsheets. The disconnect between the first two conclusions and the third appears to be due to the way human cognition works. Most importantly, we are aware of very few of the errors we make. In addition, while we are proudly aware of errors that we fix, we have no idea of how many remain, but like Little Jack Horner we are impressed with our ability to ferret out errors.”[3]

So, given this persistent reality of hidden errors, it’s important to be wary about spreadsheets in any critical process. And given the nature of alternatives—their complexities, risks and generally higher-net-worth investor base—the downside of making a mistake may be magnified. That may be especially true when the alternatives themselves are higher-risk investments. In the event of a blow-up, and potential ensuing audits, a firm shouldn’t have its reputation staked to the accuracy of an Excel file.

Beyond errors, there’s the problem of data aggregation. When asset figures are isolated in separate spreadsheets, a firm will likely struggle to have clear sense of the size and growth of alternative assets it’s handling—let alone how to handle them more efficiently.

The bottom line is that while plain-vanilla products aren’t going away, the industry’s growth is elsewhere. More than ever, recordkeepers need flexible partners who can accommodate a wide range of investment products on a single platform.

Brian Jones is executive vice president of Envision Financial Systems.

[1] “Global Assets under Management set to rise to $145.4 trillion by 2025.” PwC. October 30, 2017.

[2] Mel Glass, David Ford and Sebastian Dewhurst, “Reducing the Risk of Spreadsheet Usage – a Case Study.” Proc. European Spreadsheet Risks Int. Grp. (2009).

[3] Raymond R. Panko, Shidler College of Business, University of Hawaii. “What We Don’t Know About Spreadsheet Errors Today: The Facts, Why We Don’t Believe Them, and What We Need to Do.” (2015).