AlphaWeek Q&A: Brian Taitz, Founder, Charter Group Fund Administration
AlphaWeek’s Greg Winterton spoke with Brian Taitz, Founder, Charter Group Fund Administration, a fund administrator based in London, about the current state of the fund administration industry
GW: Brian, thanks for taking the time to chat today. You were CFO of a hedge fund before moving to the fund administration side. Having been sat on both sides of the fence, what have you learned that you would say to a hedge fund CFO now with regards to their fund administration processes?
BT: I think that managers that launch without a skilled CFO/COO, and fail to put in place the requisite building blocks (infrastructure, procedures, processes, systems etc.) to ensure that future growth can be properly accommodated, put their businesses on a risky footing. If they do have a CFO, I would suggest they go through the process of subscribing to their own fund, as an investor would, to better understand the process and identify areas for improvement and to identify potential shortcomings with their administrator.
Further, we still see many large administrators with legacy systems and poor processes that for example fail to adequately deal with equalisation or series accounting, or to reconcile between their own disparate systems and so when a client is selecting a fund administrator, they should be aware that bigger is not always better and be aware of whether they are truly outsourcing the fund administration or in fact insourcing a headache.
GW: There have been a raft of acquisitions in the fund administration sector in the past few years. Will it mean higher costs for hedge funds, given the smaller number of providers? Indeed, do you see further consolidation coming?
BT: If anything, costs have come down due to greater efficiencies and greater competition between admin firms as the industry has matured and the fund growth rate (by numbers) has slowed. It’s part of the life cycle of the industry. Similarly to what happened with audit firms - there were the Big 10 and now there are the Big 4 with 2nd tier, 3rd tier and other boutique players. Everybody has their niche and price point.
There will always be M&A activity, so yes there will be more consolidation but there will also be new players coming through although it will become harder to emerge given the ever higher compliance and regulatory hurdles.
GW: Charter Group doesn’t offer custody services, or directors of fund services. Tell us more about why you think it’s important for hedge funds to consider segregating these roles when selecting their service providers.
BT: This is a key lesson from my audit days at PwC and having watched what happened to Arthur Anderson when they failed to segregate their audit and consulting services (and were accordingly compromised in the Enron bust). More specifically in the funds space, we saw what happened with Madoff when these functions had some crossover. Independence is paramount to best ensure that investors’ interests are protected and the more discerning investors will demand this of their fund managers.
So from Charter’s perspective, rather than offering these services ourselves, we help our clients with the selection of custodians and directors to try ensure a good fit. We believe our independence and reputation are much more highly valued than trying to be all things to all people. We have no objection to offering directorship services to non-administration clients and also offer financial statement preparation services to both – so long as there is no conflict of interest.
GW: You can’t blink these days without seeing ‘fintech’ something. How has technology impacted your industry and services, and how will it going forward? What, if anything, do fund managers need to be aware of here?
BT: That is a big question to answer. My thinking is that unless you embrace new technology you will quickly become a dinosaur (i.e. extinct). The business paradigm has shifted online in our lifetimes and this will continue at an ever greater pace. You need to have the right infrastructure and safeguards in place and be open to applying new tech whilst at the same time being measured in its implementation to ensure there are tangible benefits and to minimise risks.
GW: Charter Group is based in London, but mainly services offshore fund structures. The European funds industry is seeing growth in alternative UCITS funds, and onshore funds generally due to investor demand. What’s your view on the future of the offshore fund structure?
BT: There has been a raft of new regulations primarily driven by the OECD which has meant that offshore jurisdictions and providers such as ourselves have had to work hard to ensure we remain competitive and compliant. Much of the regulation does not seem to meet the objectives of safeguarding investors so it seems the not so hidden agenda is an attempt to make the offshore industry less competitive and less attractive. Hearkening back to the question about fintech, this is also enabling governments to share tax information (eg: Common Reporting Standards) and this will be a space to watch as it may indeed reduce the attractiveness of offshore domiciles. From our perspective though we are not so concerned whether the structure is onshore or offshore (as there are onshore jurisdictions we cover), but rather we are geared towards institutional or professional funds as opposed to retail products.
To answer your question though, the offshore industry is well entrenched and taking the necessary steps to maintain its status as a primary fund domicile. Absent onshore markets putting resources into promoting and developing onshore structures that can provide tax optimisation and less red tape for managers and investors (or penalising offshore structures), my view is that the status quo will remain broadly unchanged.
Charter Group Fund Administration Ltd is based in London and services funds domiciled in most offshore jurisdictions.