With the vast majority of fund companies now outsourcing key functions of their business operations like fund accounting, reviewing the working relationships with service providers is taking on increased importance.

Boston-based Beacon Consulting Group estimated in a recent research report that 85% of asset managers have outsourced some or all of their fund accounting, fund administration or middle office activities. The issue of vendor oversight will be discussed during one of the panels at the Investment Company Institute's Tax and Accounting Conference this week.

"Many firms are outsourcing but that doesn't mean they lose their responsibility to assure information is processed correctly," says Gerry Healy, principal at Beacon Consulting Group, who will speak at the vendor oversight panel. "You want the service provider to have as much information as possible so that mistakes are minimized."

Also scheduled to speak on the panel with Healy are Craig Wright, account manager at Dimensional Fund Advisors, Nancy Grady, head of fund administration and fund accounting at Northern Trust and Shawn Correia, vice president at PIMCO Funds. Sheri Steward Morris, head of U.S. fund administration at Invesco, will be moderating the discussion.

Wright says having proper oversight of service providers is especially critical for asset management firms when it comes to the function of fund accounting.

"Outsourcing the function can provide efficiencies, best in market expertise, etc., but the responsibility for oversight of the function remains with the asset manager," says Wright. "A properly designed and executed oversight model is necessary to manage risks and achieve results."

Morris, who is also CFO and treasurer for Invesco Funds, says the panel aims to offer "expert commentary" from fund sponsors and valuable insight on the service provider side from Beacon and Northern Trust. Some timely topics she says will be raised include defining service provider oversight and how it differs from vendor management, developing an "ideal" oversight model and decisions around service provider conversions.

"Our goal is to leverage the vast experience of our panel to discuss industry best practices for developing oversight models that can evolve to meet the ever-increasing demands of our regulatory requirements and expansion of product offerings," says Morris, who has worked at Invesco since 1990.


A recent survey by Beacon showed that "siloed" operations were a major contributor to operational error. Healy stresses that a key aspect of asset managers overseeing their service provider arrangements is getting the right personnel assigned. He says it is vital for experienced staffers to be put in place who can handle analytical reviews that are often required to make sure oversight process is going properly and can grasp complex fund accounting/administration issues.

"Having experienced personnel with a comprehensive knowledge of the industry performing oversight activities, as opposed to staff that just knows one component, means that when issues occur, the upstream and can downstream considerations are addressed so that the error is not compounded.,' says Healy, whose firm focuses on improving operations of asset managers and service providers

One of the major service providers in the asset management industry is SEI, which has about 250 clients encompassing large and smaller firms. John Alshefski, SEI's senior vice president and managing director of investment manager services, says they work with clients early in the partnership to guide them how to properly monitor their work so that there is a comfort level on both sides.

"We view ourselves as a partner with the asset manager," says Alshefski. "In order to do our job properly we need to be a good partner with the asset manager."

"It's important that asset managers have staff in place with the appropriate amount of experience to perform effective oversight," says Wright. "They should have sufficient professional experience to provide them the confidence to ask the right questions, the tough questions, and be able to do analysis to identify the source of an error, should one occur."


Beacon's research outlined the importance of proper planning and communication between asset managers and service providers for the oversight process to work effectively.

Wright says important aspects of effective communication between asset managers and service providers can include daily discussions, periodic reviews and establishing performance indicators.

"Proper communication with the service provider is a fundamental part of oversight," says Wright. "Developing and executing proper communication channels for information flow, decision making, review and escalation is key to preventing issues."

Alshefski says SEI looks to be proactive in communicating with asset managers with monthly service updates and quarterly visits to go along with constant phone conversations. SEI also gives surveys to clients with 10 questions to determine how partnerships can be enhanced.

"We use the surveys as a gauge for where we are with each individual client," says Alshefski. "We have found the survey process to be very helpful."

Grady says Northern Trust assigns relationship managers for each of its roughly 200 asset manager accounts and also arranges for client service managers to be available for questions. The Chicago-based service provider also does due diligence visits with clients to make sure operations are up to speed from a regulatory standpoint.

"Effective communication is very important because of the growing complexity in the marketplace and increased regulations," says Grady. "We look for standardization of the kinds of metrics they are looking for."

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