How to Select an Administrator: Due Diligence or What to Look For - What to Ask
A Presentation given by Dermot S. L. Butler at the
"AIMA and Euronext 7th Annual Investor Forum "
held at the Palais Brongniart, Paris
on Wednesday 25th September 2002
Good afternoon Ladies & Gentlemen,
Selecting an Administrator
Before you can select an Administrator, you must have an absolutely clear understanding of your requirements - what you want, or, perhaps more to the point, what you need. This comes down to "What to Look For" and "What to Ask". Before you can make any decision on these, you must carry out your own due diligence.
It is extraordinary to me how many, Investment Managers, when acting as promoters of funds, still do not carry out even the simplest due diligence when selecting an Administrator, other than getting a fee quote.
Let me be quite categoric - due diligence is absolutely essential when choosing an Administrator and there are a lot of Administrators to choose from - believe it or not, there are over forty-three in Dublin alone. Therefore, I suggest that the first thing you should do is eliminate as many as possible and you can do this by asking the candidates to complete a detailed Questionnaire.
Last year, AIMA's Due Diligence Committee, of which I am Chairman, produced a series of illustrative Questionnaires for due diligence of hedge fund administrators, Fund of Funds custodians and administrators, Fund of Fund and hedge fund managers, CTAs or managed futures fund managers and prime brokers. By the way, these are made available at no charge to institutional investors and AIMA member companies so, if anybody wants a copy of these due diligence questionnaires, please contact Emma at AIMA and she will forward a copy to you. If you are not a member, then please remember to send in your application first. That's the only commercial 'plug' I am allowed to make today.
For the purpose of this presentation, I will just give you a brief synopsis of the Questionnaire designed for a Manager seeking an Administrator for its hedge fund. The Questionnaire has twenty-three sections under the following headings:
- Details of the Administrator
- It's Ownership
- Documentation
- Size of Group
- It's Management
- Client Relationship Management
- The Auditors
- Operations
- Equalisation
- Compliance Oversigh
- Money Laundering
- Regulatory Body/Authorisation
- Payment and Signatory Procedures
- NAV Calculation - Transaction Records
- NAV Calculation - Pricing and Valuations
- Reconciliations
- Fund Accounting
- Reporting
- Fund Systems Audit
- Corporate Secretarial and Director Services
- Fees
- Business Continuity etc.
- General - Staff
As you can see, this synopsis just gives the Bullet Points, highlighting each important area to be explained in the due diligence process. It goes without saying that under each bullet point there are, in the actual Questionnaire, several additional questions designed to "ferret out" as much information as possible. Although I believe these Questionnaires are very valuable tools, the results of these Questionnaires will not tell you whom you should select, but they will definitely indicate whom you should not select and that is the first, and a very important, stage in the process of elimination.
If, having received and reviewed the Questionnaire, you decide that a potential candidate is still in the running, you then need to carry out further checks and assessments including:
Take out references from existing clients and, particularly, from clients using the same services, operating in the same manner and trading in the same instruments as you;
Ask your prospective Prime Broker all about your prospective Administrator and vice versa, including checking that they can communicate electronically; and
Check with their regulator that they are in good standing.
When you get references, be clear about what the references say - and what they don't say. I have told this story several times before, but I still think it bears repeating. When I first moved to Ireland, I was looking for someone to work at my home. My lawyer at the time, who was a canny old bird, told me to look out for what was missing from a reference - what was written may not be quite so relevant as what was not. For example, if the reference didn't say that the person I was considering employing was sober and honest, then that probably meant that he was a drunken thief.
You should look for similar clues.
Sadly I have to say that almost every reference you get, will probably say that the referee does not accept responsibility for what the reference says, but occasionally you may get a reference from somebody saying, directly, or between the lines: "I wouldn't touch this company with a barge pole" and that, of course, would be quite useful. In fact I believe that when getting a reference, it is often better to call the referee, because they may say something "off the record" that they would not commit to writing.
Next, as a trader, you would normally "check your market". Do the same when selecting an administrator. That is to say, look at more than one administrator - hold a beauty parade - find out what they offer. And how they can add value to your product.
* You should visit their offices and see what they do and how they do it.
* Speak to the actual people on the floor who will be providing the service - don't rely on the sales person, or front man like me;
* Get your IT systems guru to talk to their IT systems guru;
* You should, quite soon, have a pretty clear idea whether they are able to offer a personal service and whether you are going to be allocated one named person as your account executive (preferably backed up by another named person), or whether you will be an anonymous account. Remember, if you have a query, you need know you only have to ring up "Joe" to get a quick answer - and not find yourself floating around the Ethernet, wandering from extension to extension, ending up with someone saying "I can't help you, because the person who did that last week has gone fishing".
Basically you have got to find out if you are going to be treated as a person or as a number.
* Ask the Administrator how many clients they have in total and, more importantly, how many clients do they have that invest in the same asset classes, sectors or disciplines as you do.
* If you are dealing in an exotic instrument, and the Administrator has never handled that instrument, then you must ensure that it is capable of doing so. The fact that it hasn't handled the instrument doesn't mean it can't, although it would be added comfort if you know, from day one, that the Administrator has other accounts that deal in the same instruments as you do.
* Review the Administrator's standard agreement and get a detailed procedures manual - a term sheet if you like - to explain exactly what the Administrator is going to do and (and this is very important) who is responsible, in which office, for each specific task.
* Check the regulatory status of the Administrator and what his anti-money laundering policy is.
* Find out what are the qualifications of the Administrators' staff - how many professionals do they have - previous employment history etc.
* You should be aware that the Administrator also has certain fiduciary responsibilities to investors, for example overseeing and verifying valuations and being able to justify them. Find out if they are capable of carrying out esoteric valuations, if required.
* As I have mentioned already, the Administrator has similar responsibilities with regard to ensuring compliance, by the fund and the Board of Directors, with relevant regulations and, particularly, anti-money laundering regulations. Find out how they handle this.
* Can the Administrator handle Equalisation?
This is not an exhaustive list:-
I could have mentioned numerous other matters that you need to look into, for example:-
- Does the Administrator have an independent electronic price feed? I stress "independent" to ensure that the Administrator is crosschecking the prices of the investments without relying on the Manager or the Broker.
- Is the Administrator domiciled in a jurisdiction with reliable telecommunications? There is no point in having an electronic feed through brokers if the telephone lines are down.
- How advanced is the Administrator's system?
- What facilities and procedures does the Administrator have in the area of Shareholder Services?
- What is the Administrator's response time to an investor or potential investor? Remember the Administrator is the interface between the Manager and the client and an incommunicative Administrator can lose the Manager that investor just as quickly as poor performance. In fact, they can lose an investor even if performance is good.
- What is the Administrator's Business Continuity Plan - get a full rundown.
I could go on for hours - but, to summarise:
- It is essential to carry out in-depth due diligence on an Administrator, whether you are a Manager or investor and to do this, you should visit their office.
- Don't rely on the due diligence Questionnaire, except for elimination purposes. That is only the first step.
- You must take up references.
- You must check the number, the quality and the qualifications of the staff.
You must check the system; and Investors must check how independent the Administrator is from the Fund Manager.
One final word on the selection process - when you have done all of this - finished the beauty parade - don't go for the cheapest, go for value.
Remember, an Administrator should add value to a fund, and the more you want your Administrator to do, then the more it will cost. Even in today's high-tech environment, administration is a labour intensive business and everywhere that Administrators operate, labour costs are rising. There is a great tendency to assume that Administration is a simple bookkeeping task and that the Administrator that can do it cheapest, is the one you want. Rest assured that this would almost inevitably turn out to be a totally false economy. That old cliche - "if you pay peanuts, you get monkeys" - is very apt in this context.
I will now, if I may, pass the baton to Pascal.
Thank You.