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Prorate New Accounts
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When new accounts come in partway through a period, you don't want to bill as if you managed their assets for the whole time. In this case, some firms will want to prorate the new account based on the number of days in the period, helping to reduce the impact of market changes on the account before the first invoice is issued. Other firms may prefer to treat the new account as a capital flow, and adjust accordingly.
Tamarac offers the following options for prorating new account value:
| Prorate based on ending market value | Prorate based on Billing Inception Value | |
|---|---|---|
| What Billing Method | Arrears only | Arrears and advance |
| How It Uses Flows | Calculates new account prorations excluding any flows, just based on number of days. | Calculates new account prorations as a capital flow. |
| How Adjustment Amount Is Determined |
Determines the adjustment amount by applying a ratio of the number of days in the period as a proration to the fee. This is a simpler method that readily allows you to audit the total fee based on the calculations reported on the billing statement. |
Determines adjustment amount based on the capital flow adjustment calculation combined with number of days. This is a more complex method that can be more difficult to audit. |
| Importance of Billing Inception Value | Ignores the initial value of the account. Instead, it prorates a new account based on number of days the new account was in the period and the billable value at the end of the billing period. | Allows you to prorate a new account based on the value when the account was initially added to the billing group. |
| Billing Inception Date | You do not need to set billing inception date. | You need to set billing inception date. |
Prorate new accounts using number of days in period is only available when billing in arrears. It is not available when billing in advance or when using average daily or monthly balance.
When you add an account to a billing group whose billing definition prorates new accounts based only on the number of days in the billing period, you don't need to take any further action to ensure accurate proration. Tamarac identifies the new account and prorates it according to how many days elapsed in the billing period before the account was added.
When you generate a billing statement, it includes an Adjustment for New Accounts section that details the adjustment amount.
Prorating new accounts using number of days in the period:
Eliminates the need to set billing inception date for every new account.
Enhances flexibility and accuracy by allowing you prorate new accounts independently of capital flows.
Improves transparency on the billing statement by adding a section just for new account adjustments.
When you prorate new accounts based on the number of days in the period, Tamarac calculates the adjustment as:
A billing group contains two accounts: Account A and Account B. Account B is a new account that was opened 23 days into the period with a $1,500 value. At the end of the billing period, each account has an ending market value of $2,000, giving the billing group a total billable value of $4,000.
Calculating the fee using a simple number of days proration produces a total fee of $8.75, as detailed below:
Account A: $2,000
Account B: $2,000
Total Billable Value: $4,000
Billing Inception Value: $1,500
Billing Inception Date: 23 days into the billing period
Calculate the gross fee.
Calculate the adjustment amount.
Apply the adjustment to the gross fee.
| Calculate the Gross Fee | |
|---|---|
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Billable value: |
$4,000 |
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Annual rate: |
1% or 0.25%/quarter |
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Gross quarterly fee: |
$4,000 × 0.25% = $10.00 |
| Billed value for each account: | $10.00 × ($2,000/$4,000) = $5.00 |
| Calculate the Adjustment Amount | |
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Ending market value for new account: |
$2,000 |
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Elapsed number of days in period: |
23 |
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Total number of days in period: |
92 |
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Calculate adjustment amount: |
$5.00 × (23/92) = $1.25 |
| Apply New Account Adjustment to Gross Fee | |
|
Total fee: |
$10.00 - $1.25 = $8.75 |
When you add an account to a billing group whose billing definition prorates new accounts based on billing inception value as capital flow, you must set the billing inception date for the first date the new account has value. Tamarac treats the value on the billing inception date as a capital flow and prorates it based on how many days elapsed in the billing period before the account was added.
When you generate a billing statement, it includes an Adjustment for New Accounts section that details the adjustment amount calculation.
When you prorate new accounts using billing inception value, Tamarac calculates the total fee as:
A billing group contains two accounts: Account A and Account B. Account B is a new account that was opened 23 days into the period with a $1,500 value. At the end of the billing period, each account has an ending market value of $2,000, giving the billing group a total billable value of $4,000.
Calculating the fee including an adjustment based on billing inception value produces a total fee of $9.06, as detailed below:
Account A: $2,000
Account B: $2,000
Total Billable Value: $4,000
Billing inception value: $1,500
Billing inception date: 23 days into the billing period
| Calculate Gross Fee | |
|---|---|
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Billable Value: |
$4000 |
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Annual Rate: |
1% or 0.25%/quarter |
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Gross Quarterly Fee: |
$4000 × 0.25% = $10.00 |
| Calculate the Adjustment Amount | |
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Billing Inception Value for new account: |
$1500 |
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Elapsed number of days in period: |
23 |
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Total number of days in period: |
92 |
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Adjustment Rate: |
$1500 × (23/92) × 0.25% = $0.94 |
| Apply New Account adjustment to Gross Fee | |
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Total Fee: |
$10.00 - $0.94 = $9.06 |
New account prorations allow you to only charge clients management fees for the portion of a billing period that a new account was in the billing group.
To add a new account proration to an existing billing definition:
On the Billing tab, click Billing Definitions.
In Select a billing definition, choose the definition you want to edit.
To create a billing definition, see Billing Definitions.
Click Prorations.
Select Prorate new accounts using and choose which proration method you want to use.
To calculate an adjustment based only on the number of days in the period, choose Number of days in the period.
To calculate an adjustment by treating the new account billing inception value as a capital flow, choose Billing inception value as capital flow.
Click Save.
