When a client asks what they own, most advisers can answer that question at the fund level. They can point to an allocation, explain the strategy, describe the manager’s track record.
What they often cannot do is explain what is actually inside the fund, whether that is a single fund or a fund of funds.
For a growing number of fixed income and multi-asset strategies, that gap matters more than it once did. These portfolios rely heavily on over-the-counter (OTC) derivatives — credit default swaps, interest rate swaps, FX forwards, options — to manage risk and express investment views. These are not exotic instruments confined to hedge funds. They are standard tools used by active managers across the commingled funds that sit in many client portfolios today.
The problem is that OTC derivatives are largely invisible at the holdings level. And that invisibility creates a real accountability gap for advisers.
The data that doesn’t travel
Unlike an equity or a bond, an OTC derivative is defined by private contractual terms. A credit default index swap referencing a basket of financial institutions behaves very differently from one referencing a sovereign index, even if both appear on a holdings report as “CDX”. The terms – reference entity, maturity date, coupon rate, notional amount, counterparty – determine the instrument’s risk profile and how it will behave under stress.
Internally, managers capture all of this. Their systems need it to value positions and manage risk.
But when holdings data flows downstream to distributors, platforms and advisers, much of that detail disappears. What arrives is typically a simplified snapshot: a name, a notional value, a market value. The contractual terms that define the instrument’s actual exposure are stripped out.
The result is that advisers trying to understand a client’s true risk profile are working from incomplete information. Risk systems cannot disaggregate exposures they cannot see. Independent analysis becomes guesswork. Fund of Fund aggregation becomes a back of the envelope exercise using total level data and the managers’ descriptions of fund exposures.
A question of accountability
This matters for advisers in a specific way. Suitability and oversight obligations require more than understanding a fund’s stated strategy. They require understanding what a fund actually holds and how those holdings behave.
When a client’s portfolio suffers unexpected losses from derivative exposure — exposure that was present but not visible in the data provided — the question of whether adequate due diligence was possible becomes uncomfortable. The information was not there to interrogate.
This is not a niche concern. As interest rate volatility, credit spreads and currency moves have all become more consequential in recent years, the derivative positions that managers use to navigate those environments have grown in significance. So has the need to understand them.
What a Fiduciary Book of Record would change
The investment industry has long maintained detailed internal records of trades and positions — what practitioners call an Investment Book of Record (IBOR). These systems serve the manager’s operational and risk management needs.
What the industry currently lacks is the equivalent built for the people further down the chain: a Fiduciary Book of Record (FBOR).
An FBOR would be a standardised, structured representation of a portfolio designed specifically for downstream oversight. It would carry not only positions and market values but the economic and contractual terms that determine how instruments actually behave – the same data that managers already hold internally, made available in a format that flows reliably to those who need it.
For advisers, the practical difference would be significant. Instead of receiving a simplified holdings file and attempting to reconstruct exposures from fragmentary data, they could have access to the information required to perform genuine due diligence. Risk analysis could be bottom-up, consistent and accurately capture correlations. Conversations with clients about what they own could be grounded in fact rather than inference.
The ask
The transparency gap described here is a structural feature of how portfolio data flows through the investment ecosystem – one built for operational efficiency rather than fiduciary accountability.
Changing that requires a shift in what the industry treats as the standard for delivered transparency. Advisers are well placed to drive that conversation. The managers who can demonstrate genuine holdings-level transparency – not just a factsheet summary, but structured data that supports independent analysis – are the ones demonstrating they understand fiduciary responsibility.
Your clients are bearing the risk. You should be able to see it.
By Chris Smith-Hill, VP at Confluence
