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Following careful due diligence and best selection practices when choosing a fund administrator is most likely to result in a good partnership, says Bob Kern of U.S. Bancorp Fund Services.
Service provider selection and due diligence processes are increasingly scrutinised as essential components of operations for both regulated and unregulated funds. Institutional investor due diligence is placing greater demands on investment managers and fund boards to understand all aspects of the service provider business and processes in order to justify the use of fund assets to pay these expenses.
As regulatory agencies impose increased regulation and reporting requirements on regulated and unregulated funds, fund sponsors and fund boards are wise to formalise their service provider due diligence processes.
The due diligence programme should begin with the required criteria and business characteristics of the best possible service firm—service attributes that provide the greatest distinction of service capability aligned with your weighting of the importance of each criterion to your specific business and investor needs. The following are factors you may want to consider when conducting service provider due diligence.
Expectations of fund administrators
Before you engage in a formal relationship with any firm, you should expect complete transparency into all aspects of the service provider’s business, to enable you to make your decision. As you prepare for, and conduct, your due diligence, keep in mind two important criteria for any business—talent and technology. These two resources impact other criteria including service capability, success, and risk of any business relationship.
"The single greatest component of your due diligence plan is the objective analysis of your findings—identifying differences between providers that will be important to you and your investors."
In addition, your primary goal in performing due diligence is to assess and quantify risks, including risks associated with your service provider selection—eg, financial, operational, personnel and compliance.
Two important discoveries you will identify in your due diligence of different firms are their ‘service culture’ and demonstration of success. Service culture defines how the firm will service your requirements, business needs and problem resolution.
Due diligence criteria for fund administration services include:
1. Service provider credentials
- Financial condition and stability
- Firm history, business diversification/concentration
- Service inception, history of each service
- Acquisition history and integration challenges
- Commitment to your specific service needs and ability to grow with your business
- Firm background check
- Third party industry ranking—size, quality, awards
- Complete client base
- Specific client base to your similar product, size
- Complete scope of services
- Insurance coverage
- Transparency of information requested
- Client base tenure
- Client turnover—wins/losses and reasons
2. People and service team
- Management team tenure, staff tenure
- Management and staff turnover
- Individuals assigned to your relationship, bios, workload, onshore/offshore
- Talent sourcing and development programmes
- Quality of firm’s reference research results
- Management and service team interview results
- Willingness/ability to customise services
- Frequency of relationship/management interaction
3. Service provider compliance programmes
- Firm regulatory exam results
- Compliance culture, commitment
- Compliance resources and management structure
- Internal training programmes
- Internal audit exam programmes
- Third party audit programme, results
- Chief compliance officer and anti-money laundering resources
- SOC 1/SOC 2 assessment
4. Service quality programmes
- Formal quality programmes—ISO, Six Sigma, etc
- Key performance indicators (KPIs)
- Service level agreements
- Service measurement programmes
- Frequency of client service performance reporting/review
- Continual improvement programmes
- KPI measurement automation tools
- External quality verification/testing reporting sources
- Service conversion history, methodology, examples
- Client data delivery capabilities, reporting
- Core technology infrastructure, history, tenure
- Recent, pending, anticipated technology changes
- Ability to customise for client-specific requirements
- Technology support teams—within/outside the business
- Information security programme, test results
- Business continuity plan, programme, test results
- External/internal technology dependencies
- Outsourced technology provider management programme
- Development methodology
6. Service innovation
- Relationship management focus, attention
- Capability to champion client regulatory change solutions
- Customised services specific to client requirements
- Ability to serve as a resource regarding all industry topics
- Value-add service or support distinctions
- Demonstration and examples of innovative client support
- Demonstrated technology innovation
- Client access to legal and tax resources
Formal due diligence process
The due diligence process should be formalised with a focus toward both selection and ongoing management of the service firm relationship. You may want to consider including the following elements in support of your process and decisions:
Due diligence plan—Your plan describes your business goals and specific factors you will use in selecting the correct service provider as well as how you will conduct your due diligence.
- Research and validation—Early in the process, be sure to identify all industry service providers through research and discussions with your peers and industry experts such as legal, audit, consulting firms, and other contacts that work with the providers—these may be your greatest source of market intelligence and provider distinctions.
- Documentation—Develop and obtain thorough and detailed documentation either directly or through a formal Request for Proposal (RFP) process.
- Analysis—The single greatest component of your due diligence plan is the objective analysis of your findings—identifying differences between providers that will be important to you and your investors.
- Recommendation—The results of a successful due diligence process should spring from your methodology and data analysis.
Investment managers must perform robust due diligence on all fund services in order to support investor and regulatory scrutiny. A comprehensive due diligence programme will aid in identifying optimal service providers and, by minimising operational, financial and compliance risks for the manager, better ensure high quality services for investors.
Bob Kern is a managing director and executive vice president of U.S. Bancorp Fund Services. He can be contacted at: firstname.lastname@example.org
Investment, Managers, Due diligence, Fund Administrator, Services, Service Provider, Technology, Management, Compliance, Programme, Administrators, Risks