The Dos and Donts of Outsourcing
February 8, 2012 9:25 PM
Thinking of outsourcing administration of an investment fund? Take a lesson or two from Blake Darcy. The progenitor of the DLJ Direct online brokerage a couple years back was trying to import the principles of value investing propounded by Columbia University adjunct professor Joel Greenblatt in The Little Book That Beats the Market
Do Figure Out What Your Core Strength Is, First.
Darcy early on decided that what Gotham was best at and should concentrate on was the investing of customers funds, servicing the customers accounts and, in general, managing the relationships with customers. That meant, in turn, keeping day-to-day operations as simple as possible. And that, in turn, ultimately meant outsourcing all facets of administration.
Do Stick to Your Guns.
Early in the process, Gotham looked at different aspects of administration that it might make sense to develop and manage in-house. One area that got serious consideration was how to configure and provide controls for the funds boards of directors to oversee the performance of the Formula Investing Funds. Ultimately, the company decided that, because the mutual fund world is highly regulated and communications between directors and managers closely watched, not do this. Instead, it made sense to use a system that already had proven controls and means of keeping track of communications and how funds choices were supervised.
Do Find a Service Firm that Wants to Serve You.
This sounds tautological. This is what outsourcers do. Its the core of their business. But different firms have different levels of interest in delivering on the promise of strong service. In his experience, Darcy got the sense that some firms just wanted the business. He wanted, instead, a firm (like BNY Mellon Asset Servicing, in this case) that wanted Gothams business and wanted to really get to know it. In meetings, he constantly looked for participants who understood not just the mutual fund business, but specifically what Gotham was trying to do with the Formula Investing funds. He looked for participants who clearly did their homework, in advance, and who got excited about what Gotham was trying to accomplish. Ask yourself, after these meetings: Does this service company understand your philosophy and can it make a clear case for how it will execute on it?
Do Find a Service Firm with Flexibility.
Gotham had never set up a mutual fund. Gotham had never operated a mutual fund. While Gotham Capital had done great things with its original $7 million (much of which came from the famed and later infamous Michael Milken), there was no guarantee that it could produce 30 percent or 50 percent returns. Or attract investment in the first place, since Bernie Madoff and his 12 percent returns had proven to be a fraud. So Darcy looked for and got flexibility on the pricing of fees from BNY Mellon Asset Servicing, which used to be known as PNC Global Investment Servicing. Fees start at reduced prices and graduate over time, as the business grows.
Do Look for Availability.
When BNY Mellon started to set up administration of the funds on its FundVantage system, its project managers held weekly meetings on next steps with Gotham point people. That is now down to roughly monthly meetings. But the key in the entire process is this, Darcy said: Who is available when you need them? Can you get on the phone the outsourcers point person on each aspect of the implementation, when a problem needs to be resolved or a decision made? And does the person that gets back to you have the ability to make the decision, at that moment?
Do Look for More than Administrative Help.
With BNY Mellon, Gotham got more than help with understanding the mutual fund market from an experience player. It got help in distributing its funds. Now, if you go to the Formula Investing Funds site and try to purchase funds, you get redirected to the mutual fund distributor of your choice, from Charles Schwab to Etrade to Folio Investing. And once you click on the link, youre not lost somewhere on the site. The four Formula Investing funds appear and the customer checks off which fund or funds that will be invested in and how much.
Dont Underestimate the Help You Will Need.
Gotham understood who knew nothing about how to operate a mutual fund and needed help and a lot- of handholding from someone who did. That meant looking for a firm that was very organized about how to roll out and administer a fund and knew what details could get bollixed up.
Dont Underestimate the Work You Will Still Need to Do.
The Formula Investing money management business dealt with minimum accounts of $100,000 and Gotham Capital was a hedge fund. Mutual funds, by contrast, are aimed at everyday investors and are highly regulated. Gotham Asset Management underestimated the amount of reports that would have to be produced, from risk-return summaries on down. It still had to hire a new staff person to administer the production of those reports. The only issue was we should have asked a few more questions about the ongoing requirements of the business, said Darcy. That would have helped in resource allocation, particularly in reporting.
Dont Feel Obligated to the Outsourcer.
Yes, the contractor may get you off the ground. Yes, the services may be useful and delivered effectively. But, dont hesitate to consider bringing the administration in-house, when youre ready. And let the outsourcer know, upfront, youll be expecting assistance in that, when the day comes.
