Can Your Administrator Damage Your Fund’s Relationship With Investors?
Although a lot of the emphasis in administration circles is put on NAV reporting and valuation, another key aspect of administration servicing is that of investor services.
In my experience though, investor services for many administrators is an afterthought rather than a core service that adds value to funds and investors.
The fundamental reason why an administrator should have a strong focus on this area, is the administrator is your representative to investors. You will be judged by investors on how an administrator handles their issues when they arise. Your administrator is the face the investment community sees and deals with.
Lack of focus, poor communication and lack of attention in this area can severely affect investor confidence. If the administrator does a bad job with investors it’s very likely to impact the confidence that existing investors have in the fund. It will hurt the marketing of the fund to new investors and it will negatively impact new products that the fund sponsor may want to bring to market in the future. In short, it will damage your business franchise.
A ‘Real Life’ Example…
By way of an example, in 2008 as I’m sure you will remember, there was a very unusual amount of redemption activity in hedge funds across the world.
Many administrators made an already bad problem worse by delaying redemption payments back to investors.
Now the underlying reason why administrators delayed releasing moneys was generally completely legitimate. They felt that they didn’t have adequate anti money laundering documentation on file.
However, the problem was aggravated by administrators failing to communicate effectively with investors during the redemption process. In fact some administrators just kept sending standard emails asking for the same information they’d asked for before, without personalising the process. Not only that but they didn´t look any further than their ‘operations manual’ to see if they could make a discretionary decision over what documentation was needed in order to release the funds.
The result was pretty disastrous for many of the hedge funds involved and could have been avoided by administrators being proactive in keeping AML files current, communicating clearly what their requirements were throughout the process.
Some investors felt that the funds were somehow doing something underhand and hanging on to the investors’ money.
I saw several examples where investors pretty much vowed that they would never invest with particular fund families again because of the behaviour (which they saw as the fund’s behaviour) of the administrator.
Finding Out At The Last Minute…
Another area that I´ve seen affect investor relations is how well an administrator communicates with the fund manager over pending redemptions.
If an administrator is not focused on the impact of their actions (in terms of how it affects investors), they will usually lack urgency when it comes to notifying a fund about pending redemptions. If the fund manager only finds out at the last minute, it’s often very difficult to liquidate securities to meet the redemption proceeds in an orderly and timely fashion.
So this is an area that can not only hurt a fund in terms of investor relations and confidence in the fund but also in terms of the portfolio management decisions that you will want to make on a day to day basis.
So what should you be looking for from your administrator in terms of how they deal with this area in their day to day operations?
- Is your administrator service orientated?
Be sure that the administrator has a culture that understands they are the face of the fund. You need to be sure they don´t see themselves just as a bunch of hired hands that just crunch numbers from 9 till 5.
Instead you want them to feel like they are a customer facing department of your fund that sees its role to help and satisfy client requests whenever and wherever possible.
- Is there daily reporting that highlights investor activity?
You will want a daily reporting process where investor activity is delivered to you including pending redemptions, pending subscriptions and transfers.
- Is there reporting that shows you all outstanding AML issues that are currently being handled by the administrator and what actions are required to clear them and by when?
- Are there very strong levels of automation within the administrator?
Dealing with investors is a difficult area and can be prone to manual processing.
If you think about how redemptions and subscriptions work , very often people are sending in faxes with regard to important investor documentation which can sit around on fax machines if there is a lack of automation. So you need to be sure that when a fax comes in to an administrator that it’s not lying around on a fax machine and instead its coming into a secure controlled environment that is process mapped, so the fax ends up notifying the relevant team member automatically and is marked as high importance for immediate action.
- Is there a personnel structure within the administrator that enables decisions to be made quickly?
Lastly you need to make sure that the people on your account are able to make decisions quickly and efficiently.
For instance where judgment calls are needed on AML , you need to make sure the administrator has the right people involved and they are experienced enough to make judgment calls quickly and deal with them efficiently.