Over the last few years a hot topic across the funds industry, regardless of asset type and investment strategy, has functioned around whether to conduct fund administration in-house or outsource to a specialist service provider.
The ongoing debate continues to gain momentum as fund managers continue to be placed under increased scrutiny from investors in relation to transparency and investor reporting, and also, the corporate governance and reporting requirements being forced from various regulatory developments throughout the industry.
The debate appears to be primarily driven by an evolving regulatory landscape and the realisation from managers as to the real cost of performing the administration function in-house, while also complying with the relevant regulatory regimes. As a result this, has a direct knock on effect as CFOs are likely to face greater risks in a variety of areas.
Despite this there are clearly some benefits for fund managers to continue administering the fund(s) internally. These include:
- Too much admin - The potential resources required to transfer the existing administration to a specialist third party service provider can appear too expensive and, as a result, act as a deterrent for pursuing the outsource option.
- Control - Loss of direct control is also widely considered to be a key factor to maintain in-house administration.
- Service quality - It is no secret that many fund managers have not been impressed with the level of service quality from various third party fund administration providers and, as a result, this has not helped fund administration companies from persuading managers to pursue the outsource route.
Despite the arguments against pursuing the outsource model, there are equally clear benefits to migrating the administration of the fund to a specialist provider. Many of these attributes function around removing the need to consistently invest in back office functions, and in particular dedicated technology that will require sustained investment during the life cycle of the fund. Furthermore, the ability for fund managers to focus on core-competences and channel their efforts in fund strategy execution in order to delivery desired investor returns is also a key benefit to the outsource model.
People and their relevant expertise is also a key factor that fund administration providers use to promote the outsource proposition. In reality, the fund manager’s time and resources may be wasted in the sourcing, hiring and training of staff, not to mention the various remuneration packages that will need to be developed to attract the right individuals for specific roles. Specialist fund administration providers will already have the necessary infrastructure in place in order to address these issues, providing comfort to the fund manager.
Despite the benefits identified above, the single most compelling argument that has certainly gained the most coverage across the industry is in relation to regulatory compliance and corporate governance. As regulation is forcing greater transparency and reporting, fund administration providers have responded to this by ensuring that corporate governance is exercised to current best practice standards and that an appropriately trained and qualified compliance team is in place to address the evolving regulatory landscape.
With this in mind, in the ongoing in-source vs. outsource debate fund managers will need to ask themselves:
- Is the company ready and appropriately resourced to respond to the evolving regulatory landscape in relation to back office administration functions?
- Are existing back office functions having an impact on the company's ability to focus on its core competencies?