One of the most tedious, but important, tasks within any mutual fund company is the mind-numbing number crunching of tax accountants.
While the task may not seem glamorous, it portends a mutual fund's ability to realize a desired gain or loss on the sale of a security, calculate the precise income payable to shareholders, and even assure that the fund continues to qualify as a registered investment company.
PricewaterhouseCoopers (PWC), the Boston accounting firm, is counting on RICMart as its technological answer to the most tedious tasks that challenge fund tax accountants. Now widely available to all mutual funds, not just those funds PWC provides audit services to, the RICMart system automates many of the manually performed computations and calculations.
The creation of RICMart was borne out of the needs of one of PWC's fund clients, but is now being made available to others. The RICMart system allows fund accountants to automate the processing of many of the increasingly complex tax calculations mutual funds face.
Technological developments have allowed for the process of mutual fund tax compliance to become automated, said Cyrus Daftary, financial services technology leader at PWC. "People today are more akin to understanding the technology and the tax process," he said.
"The goal of the system is to eliminate the most basic manual processes," said Shawn Baker, PWC's investment management leader of tax services.
And what a labor-intensive process that can be! According to PWC executives, last year alone, one of PricewaterCooper's clients processed one billion transactions.
Mutual funds, which have always had to price both portfolio securities and their funds' daily net asset values, have long been accepting of automation. But the more intensive tax processes take place only three periods during a year, Daftary said.
One period is at the end of a fund's fiscal year, when it must determine what to pay out to fund investors in the form of capital gains. The second is toward the end of each year, when the fund must be sure it has paid out most of its income to investors, and the third time is when a fund must calculate and file its tax returns.
For most, building a system that would only be used three times in a year was cost prohibitive, Daftary added.
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According to PWC, the real benefit isn't in the physical automation of these formerly time-consuming tax processes. The true payback lies in allowing the fund company's tax accountants to make more analytical and strategic decisions such as how to make a fund more tax efficient, Baker said.
Tax efficiency has become one of the buzzword attributes fund advisers are increasingly looking to tag onto their funds.
Right now, RICMart (named for the data "mart" created for "Registered Investment Companies") consists of eight separate modules with at least one more in development. But fund groups can cherry-pick only the modules they desire, and add on later if desired.
RICMart includes a "wash sale" module so that individuals can determine if a security sold at a loss will be disallowed because the security was repurchased within 30 days, meaning the transactions cancel each other out in what's known as a "wash." Sometimes a fund manager will want to take a loss then realize it has been disallowed, meaning that the fund's increase in taxable income must then be distributed to shareholders, Baker said. This module allows for a fund manager to rapidly calculate the tax impact of a desired transaction, in advance.
RICMart also includes a real estate investment trust (REIT) module that calculates the adjustments to a REIT's cash flow. These are treated as returns of capital to investors. Funds have to calculate this, as well as what this means to the cost basis of a REIT, Baker said.
The system also provides a Straddles module that figures in complex tax calculations involving the hedging of securities. This can be used by the increasing number of mutual funds that are employing hedging techniques in their portfolios (see "Up Front News," page one).
Three modules are also in tow to help fund tax personnel file a fund's tax returns.
For those fearless technology fans eager to seize the new software and get crunching, think again. RICMart isn't available as a shrink-wrapped software you can pluck off the shelf at the local office supply store. The system must be implemented by PWC at the mutual fund location, and is customizable to the precise investment products, Daftary said.
Only after PWC is allowed to review the funds' tax perspective, operations and systems can it be implemented. Depending upon the complexities, implementation can take up to six months. Based upon the degree of integration and the amount of customization that must be done, RICMart can cost anywhere from $200,000 and up.
While PWC built RICMart to address the needs of mutual funds, some of the modules have applications elsewhere, such as private funds and separately managed accounts.