Do larger funds groups have bigger headaches? If you work for a larger fund complex, chances are your concerns are oversized these days.
A slew of new regulatory mandates have been dropped on fund advisors that are already grappling with business worries, shrinking profit margins and, in many cases, scandal fallout.
But small or large, fund clients are pow-wowing with their service providers to ask an array of new questions, raise concerns and get assurances about systems' capabilities and compliance issues.
The majority of the largest fund firms prefer to do it all themselves. Fidelity Investments, T. Rowe Price and Franklin Templeton, for example, have internally built the necessary infrastructure and systems to allow them to proprietarily handle all back- office functions including fund administration, fund accounting and shareholder services.
But there are a few larger fund groups that simply don't want the extra responsibility, or the increased liability and have outsourced the back-office functions to service providers.
Although Barclay's Global Investors of San Francisco has $100 billion in U.S. assets, $85 billion is invested in exchange-traded funds through the firm's iShares branded funds. Only a fractional $15 billion is under management in the group's institutional mutual funds. Even so, Barclay's has had no desire to handle the servicing for those funds in-house. Barclay's uses Investors Bank & Trust (IB&T) to handle back-office servicing, explained Danelle Doty, manager of mutual fund administration for Barclays.
Handling servicing internally would require a huge commitment to technology, Doty said. "That is a different part of the business that Barclay's is not interested in focusing on," she added.
In 2001, already having a relationship with IB&T, Barclay's decided to outsource all of its domestic institutional funds' fund accounting, fund administration and custodial work to that firm. As part of the process, 271 Barclay's employees also shifted firms but not functions, and began working for IB&T in Sacramento, Calif., Doty noted.
Shifting qualified employees who are already intimately familiar with the ins and outs and peculiarities of a fund group is quite common these days.
This past May, ABN-Amro Asset Management hired State Street Bank of Boston to provide fund administration and investment operations services for its mutual funds in the Netherlands, the UK, Luxembourg and Sweden. To accommodate the new business, State Street agreed to expand by developing a fund servicing operation in Amsterdam and transferring 110 formerly ABN-Amro staff members to its own employment ranks.
On July 1, Boston Financial Data Services (BFDS) began providing all trade-processing functions for the mutual funds of Federated Investors of Pittsburgh, as part of the remedial actions the firm undertook after it found itself embroiled in the mutual fund scandal that began to unravel last September. As part of its agreement to outsource back-office processing, 200 Boston-based Federated employees shifted desks and joined BFDS' employee ranks. Federated retained the customer service function.
That was a 180 degree turn for Federated, which, 10 or so years ago, used BFDS as its back-office service provider, then chose to internalize all functions and handle all of the duties itself.
Top of Mind Issues
Of those mid- to larger sized firms that do outsource administrative functions, what concerns and issues are they raising with their service providers right now?
Regulatory issues are the topic du jour, agreed several transfer agency executives. Some companies that have been handling back-office functions internally are weighing their options and wondering if they can lessen their costs, risks and potential liabilities by outsourcing, they added.
Within the last year, some larger clients have stepped forward to outsource a single component or two, said Mike DeNofrio, executive vice president and senior managing director with PFPC. They are most concerned with operational risk, including adhering to the 4 p.m. trade cutoff, he said.
That's a different world from five or six years ago when, prior to the market correction, many companies with hefty profit margins were comfortable with their bulky infrastructure and internal handling of services, DeNofrio noted. "We've clearly seen a migration of the thought process," he added.
Clients are also seeking assurances that service providers have the proper checks and balances in place to prevent the fund group from regulatory scrutiny. They are asking about the systems we have and are building to track short-term trading fees and assure 4 p.m. deadlines are met, DeNofrio explained. They are also asking about the possibility of transparency between their funds and broker/dealers, and our ability to monitor trading and breakpoints, he said.
Of course, servicers like PFPC that provide sub-accounting services for omnibus accounts, stand ready to provide whatever transparency is required to assure breakpoints, redemption fees and excessive trading are tracked properly, said Nancy Wolcott, executive vice president, investor services for PFPC Worldwide. "We are perfectly capable of sharing in as much information as distributors want," she said. "All we need is for distributors to say yes, or regulators to say Thou Shalt,'" she added.
Guarding Against Timing
In many cases, fund companies and their boards are looking to service providers for data and information as to whether market timing is still occurring and if so, how are perpetrators escaping detection, or if redemption fees have helped thwart timing efforts, said George Martinez, senior vice president with Bisys Client Services in Boston. Boards are taking a zero tolerance stance.
But other regulatory issues are keeping fund company executives up at night. New filing requirements that include quarterly portfolio updates and annual proxy voting by advisory firms take time and, in some cases, especially for larger firms, require extensive collaboration, said Neal Andrews, senior managing director, fund accounting/administration with PFPC. Fund executives are concerned whether they have the knowledge and resources to handle the extra filings, he noted.
In cases where sub-advisors are managing funds, coordination of their proxy voting with the advisors is even more burdensome, Martinez said.