Fund administration: To outsource or not to outsource?

Outsourcing fund administration, for instance, has been an important strategy that is letting select firms stand out from the competition. If you are an asset manager seriously considering outsourcing, below is a discussion of its pros and cons:

Advantages

Improved transparency. Outsourced fund administrators help promote transparency and compliance in operations because they are adept at the regular preparation of reports, timely submission of statements, and have the tools to support their conduct of these functions.

Access to specialists. Fund administrators offer expertise in all the complex functions related to fund administration. Most probably, they will know much more than what your team will, because they got a headstart, and because they devote a hundred percent of their time, resources, and efforts towards solving problems in this particular domain, in the way only specialists can.

Improved relations with other stakeholders. When you have another firm taking care of some aspects of your operations, client investors will be more confident about the idea of an oversight courtesy of an independent firm. They will know that you can handle the growth of your assets, because you are not bound or distracted by the day-to-day operations especially in the middle and back offices.

Disadvantages

Added costs. The main disadvantage that prevents fund managers from tapping the support of independent fund administrators is the additional cost it entails. After all, a fund management company essentially releases money when it decides to hire an asset servicing firm.

Selection difficulty.

There is also the problem of the sheer difficulty of finding the right firm to partner with. A firm will have to spend some time choosing among many candidates, and it is not always going to be a good fit. Some may not have the right tools, or the right number of people, or the right people to handle the various fund administration functions. Others may have impressive credentials and the latest equipment, but charge too high.

But at the same time, even if one builds an in-house staff, a fund management firm still has to deal with these problems too: Hiring people, investing in technology, and establishing the procedures. It is then not surprising that many firms have chosen to get these tasks out of the way, by outsourcing.

The key is to set aside a sensible budget for fund administration, and choose a service provider with qualified staff, scalable tools, and whose goals match yours.

Leo Aranas is an online writer and blogger.