How do the needs or requirements of investors vary? What are the differences between, say, family offices and institutional investors?

A variety of services is now being demanded by investors. These range from increased due diligence to more detailed reporting. In addition, as investors take the initiative, a greater emphasis is being put on a wide range of issues including transparency, liquidity, counterparty risk and pricing.

John Buckley at Omnium has seen a trend toward investors increasing due diligence. This requires additional transparency of underlying fund investments. “The details of the services and information to be provided are negotiated between the administrator and each client,” he notes.

“Historically, funds of funds and institutional investors perform the most thorough and time-consuming due diligence, requesting transparency above and beyond traditional investor statements, which involves increased auditor involvement and often requires a variety of bespoke services such as direct linkages to an investor’s customer relationship management (CRM) systems,” he adds.

Individuals rarely have additional demands beyond the traditional administration services, but this is changing in the post-crisis environment.

At SEI, David Morrissey says the biggest differences are around reporting. “Institutions increasingly want more thorough and detailed reports. Their needs are more extensive and they also want their reports delivered on an accelerated schedule,” he says.

Stephen Castree at Equinoxe believes the depth of information and frequency is key. “Many high net worths or family offices continue to seek monthly information whereas the institutions seek daily information, often in their required format. These changing needs challenge a fund to operate with an administrator sensitive to the differing needs of the investor base and able to tailor a solution to a specific group of investors,” he says.

The differences are in the levels of reporting and the detail, according to Dermot Butler at Custom House. If the manager is prepared to provide greater transparency to institutional investors, he must ensure he is not treating those investors differently to the others. This usually can only be done by issuing another share class with different rules.

Many institutional investors require side-letters to ensure they are protected on Employee Retirement Income Security Act of 1974 (Erisa) limits, the percentage of assets of the fund that they own and similar problems. The Erisa is a US federal statute establishing minimum standards for pension plans in private industry and provides for extensive rules on the federal income tax.

Administrators need to be able to provide the reports and monitor the limits for Erisa and other requirements effectively. “A reasonable administration system should enable the administrator to comply,” says Butler.

“As far as family offices go, they are usually less aggressive in their demands than institutional investors but in some ways their hand has to be held with a greater degree of sensitivity. Although personal service is important with all investors, it probably carries more weight with family offices than an institution,” Butler concludes.

Akshaya Bhargava at Butterfield Fulcrum says the variances are generally in the detail of information on investor statements. Some clients like family offices are happy with a standard statement showing their month-end net asset value (NAV)/number of shares with a summary of performance. Institutional investors usually want more information on the portfolio, such as details about the exposure to certain asset classes/issuers/industries, leverage and benchmarking to appropriate indexes. These requirements can be met through a variety of risk analytics and reports.

Greater demand by clients for high value-added services will give rise to two sets of changes, believes John McCann at Trinity. “The core areas offered for many years by administrators of registrar and transfer agency – NAV calculation, financial reporting and regulatory and compliance services – will continue to grow significantly over the next few years,” he says.

“I foresee new services in the high value-added middle-office activities such as asset pricing/verification of prices, performance attribution, performance monitoring, risk and compliance,” predicts McCann.

Ian Headon at Northern Trust sees four key issues having an impact on future investor behaviour. These include asset control, liquidity management, transparency and counterparty exposure. “We anticipate these four issues will have a notable impact on the needs of investors and how our clients will be competing for investor flows,” he notes.

“The requirements of investors are converging rapidly in the market,” says Paul Stillabower at HSBC Securities Services. “The investor currently has all the leverage, since funds of all types are heavily focused on increasing the assets in their funds,” he adds.

“The global operating environment will ensure standardisation over time. Obvious questions such as how assets are priced, who is the safe keeper of assets, frequency of pricing and liability for errors are clearly being asked everywhere. But deeper questions are emerging, such as what happens in the event of sub-custodian default, or are assets held segregated or omnibus, are assets segregated from other clients, for example hedge funds,” notes Stillabower.

“In addition, family offices and institutional investors are behind an increase in managed accounts as a way of achieving segregation and independence from funds. This may also contribute to a polarisation in the asset management industry,” he warns. “For example, large (safe) brands gathering the largest asset pools and smaller, boutique managers closing their funds at a manageable level to optimise trading strategies and ensure that they remain nimble (and independent),” he adds.

The two common themes among all investors, according to Hans Hufschmid at GlobeOp, are the requirement for greater transparency into portfolio valuation and risk exposures and reassurance by independent verification that assets exist, positions are true and that cash reported is real.

Richard Ernesti at Citi believes that regardless of strategy or size the need for accurate and timely NAVs is important. “Market (investor) pressure will continue to drive the outsourcing trend among self-administered funds. Large institutional funds tend to dominate the top 10 administrators. These funds also control the majority of the market in terms of assets under administration. Institutional investors are more likely to require the broader breadth of services and demonstrable controls which larger fund administrators can provide,” he concludes.