Fund Administration 101
Innovative approach to fund administration and representing the priorities of fund administration in the major trade associations in the industry.
Fund administration is a service provided by a third-party firm that performs back-office and acts as an intermediary between fund managers, investors, financial advisors, auditors and others in and verifies and manages the distribution of investment assets.
The responsibilities of fund administration vary depending on the fund’s business needs and industry sector (private equity, venture capital, hedge fund, etc.).
The Advantages of Fund Administration
Generally, fund administration services include the following:
- Management of the shareholder database
- Responding to the needs of investors
- New investment and transaction processing
- Fund accounting
- NAV calculations
- Financial reporting
- Dividend and distribution payments to investors
- Communications with financial advisors, custodians, etc.
- Compliance with government regulations
Why don’t funds do their own fund administration? Fund managers have a lot on their plates. They usually don’t have the time, ability, or technology platforms necessary to conduct day-to-day fund administration tasks on their own. These are detailed, precision-oriented and specialized functions. To be done completely and correctly, professional fund administration is required. Organizations that outsource the fund administration functions to experienced companies that specialize in the field benefit from an efficient division of labor in which both parties contribute their core competencies. Fund management is also spared the complexity of hiring, training and maintaining in-house fund administration staff. As third-party fund administration activity is scaled to the needs of the fund, cost efficiency achieved without the potential for overstaffing or understaffing within an in-house fund administration team.
Why don’t funds do their own fund administration? Fund managers have a lot on their plates. They usually don’t have the time, ability, or technology platforms necessary to conduct day-to-day fund administration tasks on their own. These are detailed, precision-oriented and specialized functions.
The Advantages of Fund Administration
To be done completely and correctly, professional fund administration is required. Organizations that outsource the fund administration functions to experienced companies that specialize in the field benefit from an efficient division of labor in which both parties contribute their core competencies. Fund management is also spared the complexity of hiring, training and maintaining in-house fund administration staff. As third-party fund administration activity is scaled to the needs of the fund, cost efficiency achieved without the potential for overstaffing or understaffing within an in-house fund administration team.
There are numerous compliance, due diligence, and audit requirements that must be met in order to meet the standards of a top-tier fund administration provider. These regulations are far from simple. They can mean the difference between fund administration client funds thriving and landing in hot water with the SEC.
To operate effectively, fund administration companies will need to be able to communicate with custodians, wire houses, broker-dealers, registered financial advisors and data aggregators delivering and receiving data in formats customized to each. A fund administration system that facilitates this cooperation with live digital connections to all these participants maximizes the efficiency the fund administration provider is able to provide.
Compliance & Anti-Money Laundering
Anti-Money Laundering and Know Your Customer (AML/KYC) policies are in place to provide organizations with a clear picture of their consumers. These safeguards help to ensure that no bad actors or illegal acts take place.
Investment funds are no exception when it comes to meeting compliance requirements. Compliance is a self-contained system of checks and balances. Fund administration is uniquely positioned to fulfill this obligation for client funds to ensure that investors are appropriately accredited and vetted.
A fund administration provider should have experience with regulatory compliance and automated processes in their fund administration systems to streamline the process. Fund management should make sure that a fund administration provider knows how to obey these regulations as failure in this area can be costly. Fund administration must put in place numerous mechanisms to ensure the identity and qualification of the investors in client funds. Any investment fund’s health and longevity are dependent on the ability of the fund administration provider to meet these demands.
The technological demands required to allocate and distribute funds, produce investor tax documents, calculate net asset values and provide managers with insights into their assets and investor activities are another piece of the fund administration puzzle.
Fund Administration Technology
The days of writing with a pen and paper are long gone. Fund administration providers now use automated, less labor-intensive fund administration software to fulfill fund administration chores and report on fund activity.
Modern solutions to the fund administration process include tools like STAR-XMS, Phoenix American’s proprietary shareholder record keeping / fund administration system. STAR-XMS can do all of the following:
- centralizes and streamlines all fund administration functions and manages all investor data
- sales and transaction history
- broker information and original documents
As well as connects the central fund administration database for client funds to all the participants in the alternative investment industry for instant transmission of data to update records, resolve issues and support the data aggregation of industry platforms.
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