The future of the fund industry’s service providers and advisors to investors 195
It is also worth noting the view of Steven Brown, Professor of Finance
at New York University on this. In an interview on Opalesque TV in
February 2012, he noted that operational due diligence should feature
as a form of alpha creationand that costs for independent due dili-
gence should be about $15,000 which is not so expensive for the value
he deems it will add to fund selection.
The future of the fund industrys service
providers and advisors to investors
In the meantime the big question is: who can an investor trust? This
concerns all of the actors involved in the financial industry, from large
banks to smaller institutions, rating agencies to consultants, advisors
and managers. Many of these financial leaders, including some very
good ones, got caught up with the wave of failure that stigmatised the
2008 crisis by not thoroughly checking their facts and not doing their
jobs properly. In the end that led to direct or indirect misrepresenta-
tions. It also led very often to ignoring the best interest of investors.
What made things worse is that, for the most part, losses were borne
by the investors but not their professional bankers or managers who in
the end either kept what had been earned already or if not, nonetheless
benefited from the governments’ bail outs paid for by the taxpayer.
Fund service providers
Service providers will find it hard to justify the reliability of their work
in the years ahead unless some fundamental issues are addressed and
standards unified globally. There are still too many conflicts in the
financial industry in the way it operates to make the provision of serv-
ices impartial. The desire to see investors being better protected has
been the catalyst behind much government action world-wide for many
years, but a lack of practical understanding and a desire to limit costs on
the industry has meant that some important opportunities to improve
standards may have been missed. What is happening following 2008 is
that we are seeing a shift from the trust that bound financial advisors
and bankers with their clients, to the less personal but perhaps more
196 11
reliable government backed UCITS or equivalent fund set up which is
now trumpeted as a standard for investor protection.
As discussed in Chapter 5, however, I do not think enough is done to
secure the role of the independent third party administrat ors even in
EU regulated UCITS. This would have been essential to ensure fair pric-
ing, especially where funds use hard-to-value assets and this includes
some of the derivatives used by UCITS. The need for independence
grows in my view with the complexity of the underlying investments.
Ideally, as part of the financial industry’s processes, with the back-
ing of a stronger legal framework, the administrator should be
working with the manager to set standards when dealing with the
valuation of hard-to-value assets. This process should be fully dis-
closed to the public, with the ability to verify it by accessing existing
records proving that the valuation process is followed. There has been
an increasing trend for institutional investors to request internal pric-
ing policies, especially for level 2 and level 3 types of instruments.
However on this point, new laws have not been very effective.
In a similar vein, although custodians are also part of the complex
new regulations, in Europe at least, it is not clear what their role is in
verifying the existence of assets. Many banks work with other banks
and traditionally the ownership of assets is not always clearly pre-
scribed in legal form. This has left an industry behind the times, where
electronic trading and reconciliation systems are often too complex
to be properly implemented and followed. Again, this is an area that
is hard to penetrate for any regulator, and most have instead targeted
the need for a higher capital base in financial institutions that control
client money and assets.
Consultancy firms have been an active provider of services to investors,
traditionally acting in connection with pension funds but also more
and more with other financial institutions. Their role is very varied, but
generally it is to advise their clients on how they should invest their
money in relation to their global holdings and to meet potential future
liabilities. For example, they might provide a list of preferred funds that
they deem to be good for returns in the context of the client’s global

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