Despite today’s challenges, many funds are thriving – but how?

The Coronavirus pandemic has been a large-scale lesson in operational risk and disaster preparedness for fund sponsors. Although most disaster recovery planning failed to contemplate the scale and character of this event, the best prepared sponsors are experiencing the least risk to their ability to continue business and were able to blunt the worse effects of the crisis.

Phoenix American has had a pandemic recovery plan in place since the Swine Flu outbreak in 2009. Based on our experience and what we are hearing from clients and partners, here’s what we’ve garnered from customers regarding the current crisis from an operational risk perspective.

Disaster recovery plans are critical. Your disaster recovery plan must be comprehensive, documented and tested. It must include preparation for remote working, data replication to a remote site and significant downsizing. An unexpected loss of human resources means your firm will need to be ready to operate with a minimal staff. The “shelter in place” orders were a surprise to many firms but detailed disaster recovery plans contemplated many of the needed responses.

Electronic data beats paper. Firms that have made the transition from paper to electronic records were better prepared for whole staffs suddenly being required to work from home indefinitely. Those firms did not face the challenge of file cabinets full of essential documents. Firms using electronic payment systems, client web portals and informative websites maintained effective communication with investors. Sponsors utilizing electronic front-end systems for new investments were able to maintain sales channels without disruption. Proper levels of privacy, data security and fraud prevention were able to be maintained.

Remote sales are the new normal. How will wholesalers and sponsors sell into this new and changing environment? Video calls, online platforms, Webex meetings and online presentations will be primary channels for some time. Because no one is travelling and face-to-face meetings (particularly with older investors) are problematic in the current circumstances, new ways of selling will be adopted quickly. Greater adoption of electronic front-end systems will continue to occur. Common sense technological solutions will have to be found to keep sales going. Technologies and strategic partnerships will be an important element.

Key man risk is real. The need to work remotely in a pandemic environment highlights the issue of key man risk. If one or two people stand between your firm and its ability to continue to function there is an unacceptable business risk. If sickness, hospitalization or death strikes unexpectedly or if a family crisis forces a resignation, only having role redundancy in place in advance will keep your business from suffering.

Emergency downsizing happens. Those firms with the clearest path to achieving a highly effective skeleton crew were the best prepared for the crisis. Focus on your core competencies. Your staff should be limited to and focused on your primary mission of investments and sales. If you are forced to downsize, the essential knowledge that drives your business will be concentrated in a group of key people. If your people are not specialized but wear multiple hats, important aspects of the business will suffer if you are forced to downsize.

Preparedness is a competitive advantage. An investment sponsor that can make it through a major disaster with an intact and successful business model is going to be the better for it in the environment that follows. Your documented, tested and demonstrated ability to adapt, recover and thrive makes you a more attractive investment product to potential investors.

Fee compression continues. This ongoing trend is likely to accelerate as a result of the current crisis. If you are not going to get the fees you are used to, you have to consider the number of employees you are paying. Expense ratios will force you to consider every means of reducing costs and increasing efficiencies. Still, in an environment of reduced fees you will need to be able to scale. The right balance of staffing and outsourcing will be an increasingly important concern.

Administrative infrastructure pays dividends. Sponsors should concentrate on investments. Their wholesalers should concentrate on selling. Those with outsourced administration are better prepared for interruptions to either or both. An uninterrupted professional investor and advisor facing team allows you to deal with major problems that erupt without sacrificing attention to your investor base. Outsourced fund operations improves your ability to face challenges without concern for investor data security, continued processing of new business, communication with investors through familiar channels, responses to an upsurge in client phone calls and all the everyday business of investor service.

The COVID-19 pandemic crisis is an opportunity to re-evaluate your systems, practices and staffing. Phoenix American’s pandemic recovery plan established operational team redundancy and alternating shifts working remotely for seamless business continuity for our clients during a crisis like COVID-19.

Your firm can be tuned up in such a way that you’re better prepared for whatever comes next. These considerations for minimizing business risk, reputational risk, key man risk and IT risk represent the best possible investment in your fund and  a more stable and sustainable way of doing business.