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Practitioner Viewpoint

Independent 3rd Party Common Sense

Derek Adler of International Financial Administration Group:

If we are to be honest, virtually each and every one of us is to blame for the unnecessary mess we are now in. I am not at all surprised by some of the problems that some money managers, hedge funds and banks have to face. We all need to think of how to improve the way we do things. For money managers, that includes hiring a third-party administrator—to my mind, an essential and now obligatory service.

Allow me to declare upfront my interest in a fund administration company. Yes, I have a vested interest, but nevertheless believe profoundly in the issues I bring to your attention.

As administrators, my partner and I always had a mantra of transparency. The only possible reason why someone does not like transparency is that there must be something to hide. Therefore all of the funds that we administer have always had a daily NAV which includes and accrues for absolutely every fee and charge. No surprises at month end.

We don't like funds that you cannot value independently via an exchange or market price provider. Whose bright idea was it to accept a market price from a source that is not independent or free of conflict? You might say that the horse has already bolted from the barn, but the truth is that hundreds, if not thousands, of funds are still engaging in questionable practices. We had funds for which we obtained valuations from independent sources, but after the investments went south, the managers requested that we either place a nil-value or in some cases a cost-value on the assets.

Let me explain why this is not correct. The nil-value, whilst admirable, is strictly not correct since as an administrator we could be accused of undervaluing. The at-cost scenario is an absolute no-no, because with certain assets today people don't have a clue as to the value and the historical cost is misleading. We have firsthand experience of this type of request and have refused point blank and resigned where necessary.

Then there's the issue of fund of funds. We will not administer the top/master fund within a fund of funds unless we are the administrator throughout. We cannot rely on other valuations that generally are not produced in a timely manner, not to mention the fact that the submitted NAV could be wrong! We have been asked to carry out forensic valuations for fund of funds, going back 3 years. Due to a discovered error, the subscriptions and redemptions turned out to be incorrect. I believe there could be more of these errors coming to the surface.

Here's another small, yet crucial, issue: the control of money movements to and from a fund. At IFINA, we are a signatory on all money movements at the fund's bank account and therefore control this aspect.

Apart from the three obvious rules of transparency, control and independent valuation, there is the problem of incestuous relationships between the investment decision maker and the administrator. How many funds do you know that have an administrator closely linked to the investment manager? They can be one and the same firm. Oh, but aren't investors safe because of Chinese walls or because the manager and administrator are part of a major bank or institution? Right! Wasn't it the big names, the ones that couldn't possibly do any wrong because they were so big, that are now gone or bailed out with our money?

These practices may not change unless regulators step in. It would be easy to end potential conflicts of interest and make the world safer for investors. There is no need for over-regulation, just common sense. I was recently appointed to Team British Virgin Islands, which is a government sponsored board comprising regulators, accountants, lawyers, banks and administrators. I am pushing hard for the total independence of all fund valuations.

I was asked in a recent interview whether I thought that banks and accountants should be able to value their own funds and my response was absolutely no! There should be no links or conflicts whatsoever.