The market landscape for Third Party Administrators (TPA’s) is changing rapidly and many Hedge Funds and Private Equity firms are struggling to make sense of these changes. The major players in the marketplace are consolidating, but new Fund Administration options are appearing almost everyday. The current state of the market makes selecting the right TPA for your fund more difficult than ever.
Funds are wise to utilize a structured approach when evaluating the market for TPAs. A structured approach helps ensure that you select the best service provider to fit your firm’s unique strategy, product mix and approach to operations. Utilizing a consultant can help make certain that your Administrator selection project occurs on time and within budget.
FinServ Consulting’s Third Party Administrator selection services have already helped numerous leading Alternative Asset Managers select the right Third Party Administrator to support their growth. FinServ’s team has spent more than 200 hours analyzing the marketplace in over 20 different performance categories around functional, technical and regulatory requirements. FinServ’s experience working with Funds and TPAs has led to an industry leading perspective on the TPA Market. FinServ understands the complexities of the marketplace and can help provide guidance on how to select the best TPA for your firm. FinServ’s team places emphasis on the following best practices for considering a new Fund Administrator.
(1) Understand your Firm’s Unique Complexity
The first step in selecting the right Administrator is to understand what makes your firm unique. The right Administrator will be able to understand and even help resolve this complexity. Does your firm have both Private Equity and Hedge Fund structures? Do your investors have certain reporting requirements? Does your IT team have extremely rigid security concerns? It is imperative to ensure that the TPA your firm selects is well equipped to handle your unique operational challenges. It is also important to consider the future strategic direction of your fund. Some Administrators cannot service certain fund structures like 40ACT or UCITS funds, and will be unable to support future growth in these areas. Understanding your firm’s current objectives and future direction is crucial to selecting the right administrator.
(2) Define Key TPA Capabilities in Working Sessions
Holistically understanding your firm’s operations is also an important step in selecting the right administrator. Different functions within a fund have unique perspectives on what is important; so it is crucial to involve all stakeholder groups in the process. Furthermore, clients who operate in different geographic regions can have unique requirements that should be incorporated (i.e. specific regulatory requirements or an understanding of the local culture and methods of operation). FinServ’s methodology includes conducting workshops with different operational areas in the firm to drive the requirements that form the basis of the Request for Proposal (RFP). Creating working groups allows you to ensure that all requirements are captured, and every department feels they are part of the selection process. This inclusion drives ownership and buy in for the vendor that is ultimately selected.
(3) Spend Time on the Request For Proposal
The RFP is an extremely important document that breaks down a fund’s requirements into key areas for the vendors to focus on. The RFP will organize your firm’s key processes into well-defined technical and functional requirements. A quality RFP presents your fund’s information in a manner that will elicit meaningful vendor responses to address your key challenges. The information requested from the Administrators in the RFP will include details on the Administrator’s organization, client base, capabilities, service levels, pricing, conversion methodology, and operating model. The RFP should be a comprehensive document that serves as a basis of comparison for all of the vendors. Vendor responses should be evaluated both qualitatively and quantitatively to narrow the already short vendor list to 2-3 finalists that can be further drilled down upon.
(4) Create Quantitative Scoring on the RFP
Often selecting a vendor can become a very emotional decision. You may like the salesperson or the team, but buying based on emotions can often lead to the wrong choice. In order to separate the emotional aspect of the sales process, funds are wise to leverage a quantitative approach to balance their qualitative assessment. Utilizing quantitative scoring on the RFP allows you to compare vendors across the various dimensions that are important to your organization. The different requirements from the RFP should be prioritized and ranked, and each vendor’s response should be evaluated. Hard metrics (i.e. processing times) are preferable, but where hard metrics do not exist, vendors should be rated on a 1-5 scale indicating their strengths and weaknesses in the area.
Quantitative scoring allows your firm to make an informed decision by objectively evaluating each TPA to provide the best overall picture of which Administrator is right for your firm.
(5) Scripted Vendor Demos
The best way to ensure that a vendor can provide the services they promise is to have them demonstrate their capabilities. Sales demonstrations often focus on specific features that the sales team wants to highlight, almost exclusively focusing on their company’s natural strengths. The FinServ Consulting scripted demos focus exclusively on the functionality important to your firm. FinServ works with funds to identify their most complex operational challenges and break them down to a series of instructions to be performed by potential Administrators. FinServ has found that creating scripted demonstrations on all key requirements is a powerful tool for confirming vendor competence. Scripted demonstrations should outline exactly what you expect to see during the demonstration, and what the criteria for evaluation is. Ideally, the scripts should outline real-world scenarios using your company’s own data. This will allow you to see how each Admin handles specific requirements and allow for a meaningful comparison between the different vendors. It is also prudent to have your operational teams conduct Q&A sessions directly with the various vendors to help each key stakeholder group ensure their specific requirements are met, while building their understanding and comfort level with the process.
(6) Conducting Thorough Reference Checks
Conducting thorough reference checks is one of the most important steps in selecting an Administrator, but it is often the most overlooked. Many firms approach references as a check-the-box exercise, but funds are wise to conduct through reference checks using detailed questions. References are the best way to gauge if the Administrator will be able to perform with regard to the specific circumstances and challenges of your organization. Any administrator you consider should be able to deliver references of clients with a similar AUM and investment strategy. Your firm should ask the provided reference about the Admin’s ability to perform specific requirements as laid out in the RFP. It is also important to ask about their implementation experience, specifically, what their biggest frustrations were during the onboarding process. Asking detailed questions of the references not only uncovers key issues or areas to address with the TPA but will also reveal personal experiences that will help you get the most out of the selected TPA. FinServ has experience conducting thorough reference checks and can help guide your firm through this critical step.
(6.5) The Importance of the Team
The competency of the team supporting your account is absolutely critical, so having the ability to choose your team or have a say in who will be servicing your fund is key. The vendor’s approach to transitioning from their sales team to their onboarding and servicing team should be clear and strong. In our experience, weaker TPAs spend all their time selling and don’t clearly communicate to the onboarding or delivery team what was learned or even promised in the sales process. This means key items are missed in the onboarding process, which ultimately leads to very painful work to address the lack of communication with the TPA. You should specifically ask to involve the vendor’s core service team early in the sales discovery process. You should ask the support team questions related to your specific business challenges and evaluate their responses. Additionally, Admins service funds from different locations, so it is important to get a feel for how your account will be serviced, and who will be responsible for the different tasks. Selecting the right Third Party Administrator is an extremely important decision for Alternative Asset Managers. The market is filled with many options, and it is important to pick the right vendor. Selecting the wrong vendor can easily cost 2-3 times the amount of hiring a consultant to help you select the right TPA. Every fund is different, so it is important to ensure that any Administrator selected supports your unique operational approach. FinServ has worked with all of the top Administrators and has insight into each TPAs’ Front, Middle and Back-Office functionality, as well as their Investor Relations, Financial Reporting, Tax and other ancillary capabilities. FinServ utilizes an industry leading approach that is tailored to your organization’s unique needs. Our team has the expertise necessary to help your firm make sense of the TPA market and select the right vendor to best support your firm’s ambitions.
To learn more about FinServ’s TPA vendor selection methodologies and related services, please contact us at info@finservconsulting.com or (646) 603-3799.
About FinServ Consulting
FinServ Consulting is an independent experienced provider of business consulting, systems development, and integration services to alternative asset managers, global banks and their service providers. Founded in 2005, FinServ delivers customized world-class business and IT consulting services for the front, middle and back office, providing managers with optimal and first-class operating environments to support all investment styles and future asset growth. The FinServ team brings a wealth of experience from working with the largest and most complex asset management firms and global banks in the world.
