Should I Change Fund Administrator?

This article covers the typical reasons why funds change Administrators, and provides an overview of the transition process, to help you decide whether a switch in service provider is appropriate for your fund.

There are various issues to consider before making the decision to change Administrator. Ultimately it should be determined by whether the effort required to change provider is worth the upside of having a better-suited Administrator supporting your fund.

If you are considering the significant step of changing your incumbent Administrator, there is a high chance that you are experiencing one or more of the following common frustrations:

• Cost concerns: Some firms require relatively high fees from the start, others escalate dramatically once AUM increases. There will often be lower cost providers on the market; the challenge is determining whether your Administrator represents value for money. Most Administrators will be happy to quote for services on an indicative basis if you are interested in what other providers are charging. If you undertake this comparison, be sure to compare like-for-like, as some Administrators provide itemised quotes, whilst others may wrap many line items into a single annual fee.
• Deadlines being missed: This is a major red flag. If your Administrator cannot issue investor reporting consistent with the commitments set out in your offering documents, or if they miss statutory filing deadlines, you risk reputational damage, loss of goodwill with investors, unwanted regulatory attention and financial penalties.
• Poor communication or quality of relationship: You should be able to reach your personal relationship manager, who should ideally have hands-on experience of administrating your fund, whenever you require assistance. Shortcomings can arise more frequently when Administrators outsource their accounting back office to other jurisdictions in different time zones, for the purpose of maximising their profitability and sometimes at the expense of service levels. The Administrator is an extension of your business and part of your team. When a third-party service provider feels more like a partner than a service provider, you know that you are on the right track.
• Errors: Whilst it is not uncommon to experience teething issues early in a relationship, particularly when the first NAV is struck for your fund, the accounting and reporting provided to you should be accurate, well-presented and easy to understand. The Administrator is also key in ensuring a clean and timely audit process. Remediating errors can suck up management time, lead to lack of confidence from investors and increase the costs of other providers, particularly auditors.
• Lack of expertise: If your fund requires complex accounting, like waterfall calculations, or complex modeling that doesn’t fit with the provider’s technology platform or reporting templates, you may run into challenges. Usually this would become apparent before or during the onboarding process. However, occasionally complications can occur during a fund’s life cycle that require you to change to an Administrator who can offer different skill sets or more flexible technology platforms.
• Credibility: As with other service providers such as lawyers and auditors, in order to grow a fund and expand the appeal to larger or institutional investors, you may benefit from the credibility of an established name that stands up to investor diligence. Even if you do not experience any of the frustrations discussed above, when putting their trust in a manager, some investors will simply feel more comfortable investing in a fund with an Administrator that inspires confidence.
• Risk appetite: The risk profile of a fund can change over time for any number of reasons. The most topical example in the current geo-political climate is sanctions. Some service providers may be willing to work through and offer solutions to risk challenges, whereas others may deem that situations fall outside of their risk profile and seek to terminate the relationship.
• End-of-life issues: If your fund’s portfolio includes illiquid or hard-to-sell assets, a tailored approach may be required to services and fee structures if the original mandate becomes out-of-kilter; for example, minimum fee structures that are disproportionate to the residual AUM or the narrower scope of services that are required in a wind-down scenario.

If any of these issues seem familiar, it might be time to consider alternatives. Regardless of fund size, asset class or stage in life cycle, it is not unreasonable for managers and investors to expect a reliable and trusted expert as Administrator, who values their relationship with your fund and delivers a high-quality service. This will save you time and effort in the long-run, and should be a more efficient and cost-effective solution for your fund.

Once you have identified the pain points, you should be able to establish the type of Administrator you need and the priority requirements for benchmarking and selecting your new provider.

When seeking proposals from replacement Administrator candidates, they should demonstrate an ability to partner with you to make the transition as seamless as possible and provide flexibility to ensure no duplication of cost or effort. The broad stages within the transition process are as follows:

• Planning the handover: Establishing goals, timetables and points of contact.
• Transferring records and support: Your new Administrator can liaise directly with the incumbent provider to source the requisite records, databases and support to initialise the funds on their platform.
• Connecting with other service providers: Your new Administrator can communicate with relevant banking agents, custodians, auditors, directors and other service providers to establish working relationships and ensure there are no interruptions to the smooth operation of the fund.
• Running parallel: Your replacement Administrator may initialise the funds on their platform and shadow account the prior year for a period in order to establish a clean switch-over, but this should not result in duplication of any costs.
• Communicating with stakeholders: Updating the investors of the fund on a timely and clear basis is critical; your replacement Administrator should be prepared to correspond directly with investors to answer any questions they may have.
• Cost savings: Locking in the financial benefits of a transition will be a good news story for investors; your new Administrator can help dovetail with the termination provisions of your incumbent, so that the cost saving opportunity is maximised.

A strong Administrator will ensure that the primary responsibility for a smooth transition lies with them, and that the change in provider has minimal impact on the operators and their investors, other than to quickly and effectively relieve the frustrations that led to the requirement for change.

For more information about the benefits, practicalities and costs of switching Fund Administrators, please contact Nicole Eggleton nicole.eggleton@fticonsulting.com.

The views expressed herein are those of the author(s) and not necessarily the views of FTI Consulting, Inc., its management, its subsidiaries, its affiliates, or its other professionals.

FTI Consulting, Inc., including its subsidiaries and affiliates, is a consulting firm and is not a certified public accounting firm or a law firm.