The 13 Common Mistakes Fund Administrators Make

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You only need to look as far as the business headlines to see what happens when fund administrators and their management teams make a mistake.

Consider Infinity Q Capital Management. This year, one of its funds, worth $1.8 billion, was shut down as questions emerged about problems with valuations, among other issues. In another case, Calvert Investments paid a $3.9 million fine and $18 million to investors after net asset value (NAV) errors were uncovered in 2016.

When you’re dealing with millions or billions of dollars, mistakes can add up quickly, especially if fund administrators are leaning on Excel spreadsheets and other manual processes to do the math. At STP Investment Services, we work with fund administrators to shore up their internal operations and my team and I see the able errors, miscalculations and omissions pop up all the time.

Here are the 13 egregious mistakes we regularly see fund administrators make:

  1. High-water marks are incorrectly reset during crystallization periods.
  1. Data in the investor accounting system doesn’t match a portfolio’s accounting data.
  1. Class- level and total- level trial balances don’t tie because the accounting systems aren’t in line.
  1. Fund expenses are unfairly applied, perhaps expensed as they are incurred instead of accrued annually.
  1. Middle office and fund accounting aren’t in alignment, causing differences in how accounting entries are booked.
  1. Entries in the system aren’t correctly allocated down to the appropriate class level, triggering big discrepancies in the NAV.
  1. Inadequate controls lead to faulty accounting such as pricing issues, trading book errors, and inaccurate lot relief methodology.
  1. Incentive fees are regularly applied incorrectly.
  1. So are management fees.
  1. A bad financial data point on a security master hyper-inflates the principal because the platform’s compliance and error checklist was rushed through to get a trade to market quickly.
  1. Financial statements don’t match investor or portfolio accounting records.
  1. Fair and Accurate Credit Transaction Act (FACTA) filings and Form PF data are incorrect.
  1. Corporate action processing and timing leads to discrepancies.

Is your fund administrator making any of these mistakes? More than one? If they are, these errors—costly in both dollars and reputation—often come down to three problems: issues with the systems that track and crunch the numbers; bad or non-existent internal controls to double check information; and a lack of communication between teams as they work with various data sets.