The conversion of fund administration, portfolio accounting, transfer agent, custody and distribution services from one mutual fund service provider to another firm can be one of the most risky endeavors undertaken by a mutual fund company.
The investment manager and fund board are trusting that the successor service provider will both successfully own and manage the entire process, with minimal impact to fund operations and investor servicing. In today’s mutual fund regulatory and governance environment, the mutual fund trustees and chief compliance officer will likely face accountability for both the success and risk management of the service transition, including risks such as:
Potential Service Conversion Risks:
- Data integrity
- Fund complex reputational risk
- Investor services disruption
- NAV accuracy
- Portfolio compliance
Service conversion methodology
A successful conversion of mutual fund services depends entirely upon the thoughtful, careful planning and expertise of your successor service team and dedicated project management. In addition to having significant experience converting similar funds and services, you should consider the tenure of the conversion team and conversion management methodology employed by the service provider. A well-established conversion program will use a project management methodology to coordinate the significant number of concurrent conversion tasks and interdependencies involved in major conversions occurring in generally a short 120-180 day time frame.
Service implementation planning
The fund sponsor and fund board should be aware of two distinct aspects of their service migration — service implementation process distinct from the data conversion. The conversion of investor and portfolio data is only a part of the service implementation, which includes many other items, such as building your service team, communication protocols, establishing ongoing service performance measurement and reporting, daily reporting data and delivery. Key components of the project management process include the following critical items:
- Service Implementation Plan – The successor administrator owns the service conversion process and should create a detailed, complete conversion plan document to cover all project management office items:
- Conversion contact list – All individuals, contact details, escalation protocol.
- Detailed task list with milestones – Conversion tasks, dependencies, specific task owner and associated deadline(s).
- Communication plan – Key contacts at each service provider and fund complex, including a plan for regular conversion
dialogue.
- Customer segment notification – The plan should include consideration and potential involvement of all customer
segments.
Service Requirements Definition – One of the most critical success criteria for each implementation is the discovery, validation and documentation of service goals and objectives required of each of the customer segments. To meet these goals, the service provider should drive the process to identify and document the target service model regarding such items as investor services, communications, reporting and compliance.
Data Conversion – A fund accounting conversion will typically entail conversion of security masters, tax lots, income and expense accruals and capital stock, with parallel NAV processing for 1-2 weeks. The transfer agent conversion will generally entail a conversion point, typically a weekend, with planned 1-2 mock conversions and associated remediation from each “dry run”. Both investor and portfolio data files are required early in the process to analyze the source data, map to successor systems, validate data and plan the process, including signoff by both parties.
Service Implementation Validation – Throughout the 4-6 month service implementation process, the successor service provider will continually validate the service and conversion requirements as well as task goals, to confirm the target service environment. Best practice data validation includes robotics automation to quickly and easily identify any exceptions to the transfer of accurate data. Audit processes should be built into each conversion task.
Potential risk considerations in mutual fund service conversion
Within each service, there are several risk considerations that should be part of the conversion process, including such items as:
- Fund administration and fund accounting services – validation of portfolio data as well as accounting and compliance methods – the conversion can be a point of process validation or improvement for items such as ideal automation, account reconciliation and compliance testing.
- Custody services – portfolio asset reconciliation and identifying, tracking managing pending portfolio activity through the conversion date, including trade settlements, fails, interest, dividends, corporate actions, proxies, and reclaims.
- Transfer agent and shareholder services – investor account data reconciliation, financial intermediary coordination, pending NSCC trades, contact center preparedness and investor tax reporting.
- Distribution services – dealer selling and servicing agreement conversion and coordination of 12b-1 distribution fee payments.
Conclusion
The success of a conversion of billions of dollars of mutual fund assets and hundreds of thousands of investor accounts depends on the expertise of the successor service team. This expertise drives the successful project management process, all stakeholder requirements analysis, the audit of data and processes, and the validation of service implementation results. The conversion team talent and project management process minimizes inherent process, exception, financial, operational and reputational risks associated with large service implementations.
