Perhaps the most value from AUM reporting comes from the attribution of net flows into at least inflows, outflows, transfers and investment performance. Much can be gleaned from how the asset book moves over time, firstly in terms of understanding the client base and then by using that analysis to model future performance.
In this article, we will look exclusively at inflows and leave the other elements to future editions. To quickly touch on a definition, an inflow is clearly a movement of cash, stock or any other instrument into the organisation from an external source.
Firms that maintain a basic reporting structure may find inflows conceptually easy to report. Simply take a transactional breakdown from Operations or the Core Platform, exclude any internal transfers and report the remaining inflows in their entirety. It sounds easy, yet data availability and then data quality may be significant hurdles to overcome.
Things get a little more complicated where a firm has segmented their asset book for more insightful reporting and analytics. Even more so when family structures are embedded in the reporting. Take for example a new family grouping where the lead individual pays £1m into their Execution Only account only for the Investment Manager to then apportion the balance to various discretionary portfolios held by the husband/wife, a couple of children and possibly a trust.
Should the inflow be reported as an Execution Only inflow? Probably not based on the old accountant’s adage of “substance over form”, but many firms will struggle to link the transactions and present a true picture of what has happened. Inflows as such need to be modelled based on both policy and data constraints. Getting the model right is critical for ongoing performance measurement, not least if business development teams are incentivised on both the quality and quantity of inflows.
Modelling of inflows can also take advantage of other reporting dimensions. For example, firms may be able to split inflows by new clients, acquisitions and existing clients if the static data allows. Powerful reporting tools should be able to segment inflows much further, for example looking at inflows for new Discretionary clients per branch, linking through to the associated Introducer and ultimately to the rate cards and discounting applied.
We are now on part 4 of this series and there is a consistent message coming through that is fundamental here too. Whatever the inflows model adopted, we recommend that a firm wide definition is agreed and consistently reported on. The reporting function should also maintain a full audit trail of how the numbers have been consumed, translated and ultimately reported.
FinanceBI are specialists in data and reporting solutions for the wealth management industry. Visit us at https://FinanceBI.com for more info.
See original blog: https://www.linkedin.com/pulse/firms-need-understand-quality-inflows-well-quantity-paul-brann/
