Background
The ever-changing regulatory landscape, increasing investor demands and rapidly evolving use of technology are driving a trend towards outsourcing in the fund administration industry. Traditionally, many fund managers/investment clubs/associations performed the administration of funds in-house. However, as the reporting demands of both investors and regulators grow, so too does the need for specialist knowledge, processes and technology, which independent third-party administrators are well placed to provide.
By outsourcing administration needs of a fund to a strategic partner, fund managers are able to concentrate on their core competencies of investment analysis and selection and generating returns for their investors. In addition, they can take advantage of the third-party administrator’s expertise and economies of scale (the administrator will service multiple clients and fund structures), thereby gaining access to the latest fund analysis and reporting technology at a lower cost than if they were to implement it themselves.
This article highlights the benefits of outsourcing fund administration as well as the different operational models available to ensure that, once a decision to outsource has been made, fund owners are able to retain the level of control they desire over the flow of information to their investors.
Why outsource fund administration?
Investor demands
Institutional and some retail investors are undertaking more detailed due diligence on a fund’s operating practices before committing capital. This due diligence goes beyond the traditional analysis of a fund manager’s track record and investment team and now incorporates analysis of all parties connected with the fund.
Investors increasingly expect to see that an independent third-party fund administrator has been appointed with the experience and technology in place to provide detailed reporting on their investment as well as process transparency. Investors are increasingly prioritizing governance structures and compliance enforcement for their funds and independent fund administrators, such as Axis Fund Services Limited, are better positioned to provide an oversight function on these.
Investors are also increasingly considering the environmental and social impact of their investments, as well as the corporate governance of the investment structure. They therefore wish to see reporting on environmental, social and governance (ESG) factors. The best fund administrators are able to track and store all of this information and have a team of technology savvy professionals on hand to build tailored dashboards and deliver portfolio analysis reporting.
Access to technology
In line with the rising expectations of clients and investors alike, fund administrators are increasingly embracing technology in order to deliver the high level of service required. Specialist fund administration platforms allow data to be tracked at each level of a fund structure making it easy to consolidate data into one system.
Data integrity is also enhanced thus minimizing the risk of error associated with manual spreadsheets. State of the art technologies employed by independent fund administrators provide comfort to investors as far as data protection is concerned. Investors also get access to their fund information through different communication channels.
Regulatory Requirements
Over the past few years, regulatory reporting requirements have become increasingly complex. There is therefore the need to have professionals who can provide reports of the fund which are in line with global standards. Keeping up with changing regulatory and reporting frameworks requires significant resources from fund owners, however, independent third-party fund administrators with specialist staff are best placed to meet the mounting requirements.
Reduced Operating Cost
Outsourcing provides fund managers/owners with the opportunity to reap the benefits of fund administration infrastructure, while avoiding the costly and time-consuming process of implementing and maintaining the technology in-house. These cost savings can ultimately be passed on to the fund manager’s investors through reduced overall fees.
Operational Models
Although there are clear benefits to outsourcing, lack of flexibility, loss of control, staff turnover and the ability to trust an external provider are genuine concerns for some fund managers/owners. The third-party administrator therefore has to demonstrate that they can be trusted and deliver client-focused solutions in order to allay these fears.
Central to outsourcing concerns is the fact that most fund managers/owners will want to retain the primary relationship with their investors. The flow of information between fund manager, administrator and investor therefore needs to be carefully considered.
Below are three possible investor interface models for outsourced fund administration:
Traditional
Traditionally, all administration tasks throughout the lifecycle of the fund are completed by the third-party administrator and are circulated via email to the fund’s investors. While the fund manager/owner may choose to review a calculation or call notice produced by the administrator prior to it being shared externally, the administrator is the interface for the investors.
Given its efficiency in terms of saving the fund manager’s time, this model is still commonly used. However, there are other options for fund managers wishing to retain a greater level of control.
Portal
All investor communications are delivered via a secure, web-based portal. Each time the fund administrator produces a new document, it is loaded to the portal and a communication is generated to let the investor know that a new document is available to view. Investors can access all historical communications related to their fund investment at any time. The interface itself can be branded with the fund manager’s logo and the link to the portal can be via their own website.
No Contact
With this model, the fund administrator performs a 100percent back-office function, with little or no contact with the investor. Administrative tasks are completed by the third-party administrator and the output of these tasks is sent to the fund manager for review. The fund manager then in turn issues the communication to their investors. While more time consuming, this allows the fund manager to retain control over the flow of information to their investors and ensures they retain the primary relationship.
The Path to Success
Quicker, more frequent, customized, sophisticated, dynamic, real-time accessible, transparent: these are just some of the key words when defining the reporting needs of investors today. As such, the outsourcing of fund administration has evolved into a more complex and tailored delegation of operational expertise. With the industry trend towards outsourcing back-office functions set to continue, the fund administrators that will thrive are those able to meet rising demands through the application of innovative technologies and a flexible client-centric approach.
Axis Fund Services Limited (a subsidiary of Axis Pension Group), is an independent third-party fund administration company which offers middle to back-office solutions to investment funds. We have leveraged on our expertise and technology over the years to broaden our administration offering to other collective investment schemes. We support mutual funds, welfare schemes, group or association funds, endowment funds, pension or provident funds and specialised trust funds with back-office operations while their fund sponsors focus on their core businesses.
“So far, our business proposition has been widely accepted by key industry players, who have expressed satisfaction with our service – the ease in operations, reduced service cost and swift response to requests. Additionally, the deployment of an online portal and other cutting-edge technology have also given clients real-time access to information, an important requirement for boosting investor confidence,” says General Manager, Ernest Attimah.
