S imply put, fund Administration is the outsourced performance by a third party of back-office functions for an investment fund. In terms of the investment portfolio (the asset side), fund administration involves accounting, tracking and reporting transactions and values for the portfolio as a whole and, if necessary, for the portfolio assets individually. In terms of the fund’s shareholders (the investor side), fund administration means establishing and maintaining the investor registry in a specialized fund administration software application and seeing to the investor-related processing of forms, payments of distributions and sales commissions, capital calls, and necessary communications with the fund’s investors, their financial advisors, and other intermediaries and industry participants.
Full-service fund administration also includes online account access for investors via an investor portal, the production of tax documents for investors, bank account management for the fund, regulatory compliance services, printing, fulfillment and interaction with the fund’s auditors. The goal of full-service fund administration is to free the fund management from the expense and difficulty of employing and managing in-house teams for these non-core functions so that management can concentrate on raising funds and acquiring assets.
Among financial services professions, ‘fund administration’ can be a nebulous term. There is no established vocabulary for the third party fund administration role in the investment fund industry. Managers of funds with only a few investors often consider a fund administrator to be simply a fund accountant. Managers of funds with hundreds or thousands of investors often engage what they call a fund administrator or a transfer agent to manage the needs of the investors, while separately engaging an accounting firm to manage the fund accounting. Full-service fund administration firms perform all the back office functions on both the asset and investor sides and may offer additional services, reporting capability or data aggregation stemming from their role-based access to both portfolio asset and investor data.
Outsourced fund administration is increasingly popular among emerging fund managers. Established investment firms are also finding it prudent to transition from in-house administration to third-party fund administration. There are 10 principal considerations driving this trend.
- An effective division of labor makes any organization its most efficient. Investment fund managers have expertise in raising investor capital and making lucrative investments. Portfolio accounting, shareholder management and financial communications are specialized fund administration functions subject to considerable investor demands and regulatory scrutiny. A fund administrator has the specific knowledge of processes and specialized fund administration software to perform these functions most effectively. Management benefits from the perspective, experience and knowledge of operational complexities only a fund administrator can provide.
- Fund administration saves management costs as pricing is based on services rendered. Fixed payroll costs for an in-house team are substantial and are often not in line with the back office demands of a fund at any given time.
- Fund administration services scale smoothly with the growth of the fund. Sales success can be a liability for a fund when hundreds or thousands of new investors become an unmanageable burden on in-house back-office processes. Advanced fund administration software applications operated by a well-equipped fund administrator are capable of managing at a functionally limitless scale. Staffing flexibility within a fund administration provider is able to respond to increases in scale providing as-needed operational staff to ensure continuity of service eliminating the need for fund management to hire, train and provide office space and benefits for additional personnel as the fund grows.
- Multiple share classes, reinvestment plans, and complex fund structures can be difficult or impossible to manage with an in-house team. The specialized systems and experience of a fund administration provider gives fund management the flexibility to pursue business strategies that would otherwise be operationally challenging.
- Regulatory compliance, data security and business continuity is systematized by the systems and processes of a fund administrator and removed as a source of business risk. Fund administration providers that are SEC-registered and Service Organization Controls (SOC) audited adhere to exacting performance standards and data security protocols.
- Fund administration represents the best use of investor funds in the service of the investors. Professional outsourced investor-focused services delivered with cost-effective efficiency are recognized and appreciated as a prudent fund expense.
- Connectivity with industry participants such as wire houses, broker-dealer clearing firms, RIAs, and family offices is built in to advanced fund administration software applications, maximizing the visibility of fund management’s products and streamlining processes involving outside parties.
- Management benefits from their fund administrator’s operational knowledge and insights derived from its other clients, its history and its industry relationships. Fund administrators are acutely aware of changes in regulation, best practices and the most efficient structures and processes for managing various types of funds and strategies.
- Institutional investors, in their due diligence process, typically consider outsourced fund administration essential infrastructure for a fund in which they will invest. Pension funds, family offices and ultra-high-net-worth individuals recognize the importance of a professionalized division of labor.
- The sales reporting capabilities of some fund administration software applications leverage sales, transaction and historical data to provide valuable business intelligence to wholesalers helping to drive new investment sales.
On a day-to-day basis, fund management’s working relationship with its fund administration team should be very much like working with an in-house team of employees, with points of contact and work flow established at the outset to conform to management’s preferred way of doing business. Management will have direct access to the investor database, investor and asset-side reporting for all filing, business review and sales strategy needs, and review-and-approval of any back-office processes as specified by them. The result is a partnership that capitalizes on the proficiencies of both parties to streamline and simplify the task of fund management to the benefit of investors.
About Phoenix American
Phoenix American Financial Services provides full-service fund administration, accounting, transfer agent and investor services as well as sales and marketing reporting to fund sponsors in the alternative investment industry. The Phoenix American aircraft group provides administration and accounting services for securitizations specializing in the commercial aviation leasing industry. The company is a subsidiary of Phoenix American Incorporated along with Phoenix American SalesFocus Solutions, providers of the cloud-based MARS CRM, Sales and Marketing Reporting and Compliance Management solutions for banks, insurance companies, asset management firms and other financial service organizations. Phoenix American was founded in 1972 and is headquartered in San Rafael, CA.