As an investment manager, it is not always clear who should be your third-party fund administrator (TPA). When opening a fund, it’s not the first priority for many due to lack of awareness rather than importance. The choice often comes down to a Google search or a referral. Fund managers who take the mindset that fund administration is commoditized, and who are not continuously reevaluating the relationship with their TPA, may be missing on key attributes that can greatly benefit the customer experience.
Over the past year, I have been fortunate to meet a number of great investment managers - small and large - representing dozens of different asset classes and investment strategies. I'd like to share some key observations I have made that can greatly aid in a TPA search as well as comment on attributes I’ve found to be very useful.
Before going into detail, it is important to ask a fundamental question:
Why do firms outsource fund administration and what value is the fund administrator providing?
A fund administrator is an independent third party who can calculate profit and loss, provide NAV, investor services (such as AML and handling client inquiries) as well as provide comfort to investors for them to know that the assets and reports are accurate.
For the vast majority of Fund Managers, it is often significantly cheaper and more efficient to outsource fund administration. Attempting to run the process internally can cost hundreds of thousands of dollars and requires hiring and training multiple employees. Moreover, given the potential for malfeasance emanating from poor internal controls, having a TPA perform calculations and services is the preferred structural setup for the vast majority of professional investors.
There are a handful of key requirements in a TPA that serve as a basic guide for every Fund Manager, from startup to established. It is vitally important that your administrator is delivering on the points below.
People are of the most important part of the business; find an administrator with a quality team. You will have many questions (especially if you are inexperienced) and you will want someone who can answer them. Issues will inevitably come up and you also want someone who has the ability to solve them quickly and efficiently.
Point of contact - Find out who your main point of contact will be - you want someone reliable and someone who can answer all your questions. If your point of contact cannot answer every question, make sure they work closely with the people who can.
I am proud to say that I know the right people at my firm who can solve any back-office problem.
Flexibility - Ask about flexibility. It is an often overlooked attribute that in the past even I would have missed. Ask about a time where the TPA had to use creativity to solve a problem. I am proud to say that we at Sudrania have solved problems for many clients whose admins didn't have the flexibility or knowledge to execute.
Ease - The onboarding process, which is a fairly standard procedure, is often where the first red flags appear. For example, do you need a team of four lawyers and compliance people to read a service agreement, or is it straightforward and readable? If the TPA has multiple levels of service, make sure you’re not overpaying for what should be standard features. If towards the end of a process, you are still unsure and you have multiple funds, it is perfectly acceptable – if not recommended – to test one fund, as opposed to moving all of them over at once.
Cost is the top driver of choice for most Managers – particularly emerging managers. In no uncertain terms, and I will be extremely blunt: many managers are significantly overpaying for fund administration
If a Fund Manager has been using the same TPA for 5+ years, I believe it is their duty to investigate competitors. Currently, many large and/or specialized firms are significantly overcharging clients, so it is important that a Manager shop around to assess options. During the evaluation process, it is important to ask what a high-cost TPA is bringing to the table.
Naturally, different fund structures will have different costs - a vanilla equity fund trading with a single brokerage is significantly easier to administer than a strategy that is less liquid or more obscure. Client to client will typically vary, so it can be hard to compare apples to oranges here. Getting multiple quotes is key.
Although cost is one of the most important factors, it is important to make sure that you are getting the correct service. Make a friend – ask for references! Specifically, a fund manager with similar characteristics to your own (similar AUM, assets, investors, etc.), will be the most representative. Ask this referral about their experience regarding response times, deliverables, other service providers they've used or spoken to, and anything else you need clarification on.
When it comes to technology, many admins will use legacy technology such as spreadsheets - which are prone to manual errors. Many admins will license clunky, difficult, and expensive software (a cost that gets passed on to you). Some of the larger, more established admins have their own software. We at Sudrania spent over 2 years building a software solution to automate reporting, which brings huge cost savings to Fund Managers.
Here ere are the minimum capabilities that a fund manager should have access to:
Manager portal - As an investment manager, you should have a reporting platform. This portal should provide key details such as investor balances, P&L, accounting reports, NAV's, capital activity, and investor summaries.
Bonus points if you get a dashboard and client-specific reports - these may include attribution and exposure reports, accounting reports such as balance sheets and income statements, tear sheets, or even custom-built reports.
Investor portal - Your investors should be given a basic portal to login and check their statements at the very minimum. Many portals provide period returns (daily, monthly, quarterly, etc.) and documents such as newsletters. This may be integrated into your website and white-labeled.
Information Security and Cybersecurity – – Information Security and Cyber security are currently a top priority with regulators globally. Your fund admin is holding valuable personal details such as trade activity and investor's personal information. It is important that someone else has performed a detailed audit of the fund admin’s security. I recommend asking for and reading a copy of their SSAE / SOC 1 or SOC 2 audit reports.
SOC audits are useful to get an independent auditor's perspective of the internal control and information security controls of the Fund Admin. It helps one get an assurance that one’s data is safe. The SOC report highlights major items of non-compliance and how these might impact a business. SOC audits are conducted by a third-party auditing firm or a licensed CPA firm in accordance with SSAE18. The audits assess different levels of service or security. Here is some brief information below about what each type of report contains:
- SOC 1 Type I - focuses on how well designed a service organization’s internal controls and operational processes are.
- SOC 1 Type II - adds to the SOC 1 Type 1 whereby the auditor's opinion of the internal control’s tests for the effectiveness of the internal control over the audit period. In a Type II, a client user not only gets comfort that the controls are in place, but also that the controls are working as intended.
- SOC 2 Type I – Similar to a SOC 1 report, in a SOC 2 report, the auditor evaluates the design effective of service organization’s controls that relate to availability, security, processing integrity, confidentiality, and privacy. The criteria that are used for evaluation are those that are outlined by the AICPA’s Trust Services criteria
- SOC 2 type II – the operating effectiveness of the internal controls are evaluated to provide an opinion that the client user’s data is secure, confidential, systems are available as needed, the processing is carried out in a complete and integral manner etc.
- SOC 3 type - Finally, a SOC 3 report is a general use report that can be displayed on the Fund Admin’s website, unlike SOC 2 reports that are restricted reports and cannot be used for marketing or general use.
Manoj Jain, CPA, has stressed the importance of SOC reports in vendor evaluation. He says that as a buyer looking for a Fund Administration, visibility into their information security and privacy practices is an important piece in the vendor evaluation process, and SOC 1 and SOC 2 reports, along with SOC 3 reports help significantly. When you review an SOC 3 report, you can rest that the Fund Admin has undergone a comprehensive review of their security measures and is in compliant with those criteria to a great extent.
4. Customer Service
People have come to expect substandard customer service in the financial industry. In the past, it was an industry that has taken its clients for granted. It need not be the case and is changing.
Investor services is a common feature of fund administrators and it is important that a TPA treats investors right. The number of investors a Fund has is a huge consideration when selecting a TPA. A small shop may do well with a handful of investor inquires but may be overwhelmed with 1,000 inquiries, so take this into consideration as well.
Finding a quality fund administrator is a critical part of the Fund formation process as well as an important part of ongoing service provider due diligence for established Funds. Although referrals are one of the best ways to find a fund administrator, it is important to assess multiple vendors to find the one most suitable. It is important to learn about a TPA’s:
- Customer Service
Even if a Fund Manager has used a vendor for multiple years, I believe it is their obligation to continuously investigate new solutions. Whether it is price, service, or technology, I believe you may be shocked at how the industry has evolved over the last few years.
If you need help finding a fund administrators or other service providers in the financial industry, please reach out as I am happy to share more information about Sudrania Fund Services or additional vendor contacts.
What do you think is the most important thing to look for in 2020 from a fund administrator?
I’d like to thank Shalin Madan, Founder of Bodhi Tree Asset Management, LLC ( https://btam.co/) for his assistance in writing, as well as Manoj Jain, CPA, ( www.riskpro.in ) for his contributions to this article.