The ending value for an account in PortfolioCenter frequently does not match the ending value on the brokerage statement. While this has been true since I started using PortfolioCenter in the pre-email stone age, it has become a growing problem in the post-Madoff, SEC audit world. My managers have watched SEC auditors attempt to “reconcile” brokerage statements to PortfolioCenter reports and management fee calculations, only to complain when the more accurate PortfolioCenter value differed from the statement value.
Late dividends can mean PortfolioCenter reports “overstate” client portfolio values as much as $500 – $1,000 compared to statements, so management fees are $5 – $10 “too high.” An auditor may not overlook that increase across all clients and reporting periods, so what explanation can you give them other than “the downloads made me do it”? Here are three ways to deal with this problem:
1) Run your bills on the ending values before posting any late transactions
Upside: Your management fees will be calculated on the value closest, if not identical, to the statement value.
Downside: Since you must post those late dividends eventually and run performance reports, the ending value on your performance reports will not match the ending value on your bills. However, since the value used for fee calculation is likely to be lower, your clients may simply ask questions, rather than complain.
2) Run your bills on the ending values before posting any late transactions AND manually change the trade date of all late transactions to the first day of the next month.
Upside: Not only does this method keep the PortfolioCenter value close to the statements, it preserves that value, so that the ending value on your invoices, performance reports and brokerage statements all match.
Downside: Depending on the size of your practice and diversification of your portfolios, this method can be very time consuming and error prone. But even more important, changing the date of December dividends which arrive in January corrupts your tax reports.
3) Post all late transactions, run your bills and performance reports on the updated values and add a disclaimer to your invoices.
Your disclaimer should say something like: “The market values on this report may vary from the market values shown on your brokerage statements. This occurs because some mutual funds may be late in distributing monthly dividends.”
Upside: This method produces the most accurate performance returns, the most accurate ending values and the same ending value on all your PortfolioCenter reports and invoices. You have acknowledged the possible differences, set a policy on how you handle the differences, and notified your clients that these differences affect the values on which fees are calculated.
Downside: This method potentially results in the greatest dollar difference between PortfolioCenter and the brokerage statements.
Bottom Line: Choose a method, be able to explain it and use it consistently. Whatever method you choose, I recommend making a backup of the PortfolioCenter database on the day you calculate management fees and saving that backup along with a PDF of the client invoices. With this backup, you could reproduce the exact same fee calculations during an audit if necessary.