Balancing efficiency with effective oversight when using third-party administrators

Third-party administrators (TPAs) have become an integral part of today’s asset management operating model, supporting functions such as fund accounting, investor services, and net asset value (NAV) calculations. While outsourcing provides operational efficiencies, it does not transfer fiduciary responsibility. Asset managers remain accountable for overseeing their service providers and ensuring the integrity of financial reporting.

For many asset managers, a TPA provides more than administrative support, it becomes an extension of the firm’s operating model. These benefits extend beyond cost savings to improved data utilization and operational efficiency. Modern fund administration platforms can transform large volumes of operational data into structured reporting and actionable insights. TPAs can also provide investors with customized secure portals that offer real-time access to capital account statements, tax reporting, and key performance metrics. The TPA provides technology and security infrastructure to support these services, helping asset managers enhance operational efficiency and the overall investor experience.

Beyond operational efficiency, TPAs can also strengthen a fund's internal control environment by introducing segregation of duties and independent processing of transactions. TPAs help administer fund accounting, investor allocations, and NAV calculations in accordance with the fund's governing documents, while providing an additional layer of operational review.

As with any strategic service provider, the relationship should be supported by ongoing communication, performance monitoring, and clearly defined responsibilities.

Valuation is one of the most critical aspects of financial reporting for investment funds and requires close coordination between the asset manager and the TPA. While managers determine and approve fair values, TPAs incorporate those valuations into the fund's accounting records and NAV calculations. Strong communication and periodic reconciliations between management-approved valuations and the TPA’s accounting records help ensure NAV calculations remain accurate and reduce the risk of discrepancies.

System and Organization Controls (SOC) reports are an important component of vendor oversight, but they should be viewed as part of a broader governance framework rather than a substitute for management oversight. While a clean SOC Report provides assurance that the TPA’s controls were suitably designed and operated effectively during a defined testing period, it does not validate the accuracy of the fund’s financial data and should be considered alongside the asset manager’s broader governance and control activities. It’s equally important to remember that the report’s effectiveness depends on the asset manager performing its Complementary User Entity Controls (CUECs). These are the controls that remain the responsibility of the asset manager. Executing these controls helps strengthen the overall control environment and supports reliable financial reporting. Regular review meetings, key performance indicators, and periodic vendor due diligence can further help asset managers evaluate whether TPAs continue to meet operational and regulatory expectations.

As TPAs assume a greater role in day-to-day fund operations, asset managers should also consider the operational risks associated with relying on a critical service provider. Understanding the administrator's cybersecurity, business continuity, and disaster recovery capabilities is an important component of vendor risk management. Asset managers should also understand how critical operations would continue if a TPA experienced a significant operational disruption. Periodic business continuity reviews and contingency planning can help strengthen operational resilience and minimize service interruptions.

TPAs are now a permanent part of the asset management landscape. While they deliver significant operational benefits, successful outsourcing depends on effective governance and continual oversight. A well-defined oversight framework enables asset managers to maximize the value of their TPA relationship while maintaining strong financial reporting and protecting investor interests.

Baker Tilly's team of specialists help asset managers enhance operational efficiency while maintaining strong governance and financial reporting practices. To learn more about the services we offer asset managers of all shapes and sizes, check out our website.