EP 7: Third-Party Management Companies and Host ACDs Are All the Same, Aren't They?

Third-party management companies and host ACDs are all the same, aren't they? It's a common assumption, and one that can cost a fund manager dearly if left unchallenged.

In this episode, Wayne is joined by Giles Swan: public policy and regulatory consultant, former UK financial regulator with 25 years of international experience across investment services, digital assets, and payments: to unpack the role of host ACDs and management companies: the central service providers responsible for a fund's investment management, marketing, and administration, yet almost invisible from a brand perspective.

They explore why a portfolio manager, despite coming up with the idea and choosing the ACD or Manco, ends up delegating investment management to the very entity they appointed. They get into why reputational risk sits squarely with this choice, since poor administration or service can undermine a fund regardless of investment performance. They discuss what actually differentiates providers in a selection process: jurisdictional reach, service quality, business model, ownership, and cultural fit, and why price should rarely be the first consideration. They also cover why growth plans, regulatory support, and existing relationships with custodians or administrators matter as much as the headline pitch, and why a lengthy RFP process across every provider in the market is rarely the most efficient way to reach a good decision.

The throughline: they are not all the same, and getting this choice right is foundational to how smoothly the rest of the business runs.

If you want to understand where your model sits and what it needs to work harder on, the Roadmap to £10bn package is the place to start: https://www.zeyro.one/roadmap-to-10bn-package

Transcript

SPEAKER_00 0:00

Third party management companies and host ACDs are all the same, aren't they?

SPEAKER_01 0:12

So, gentlemen, so that's a controversial statement, right? ACDs, mancos, they're all the same. But before we get into that a little bit, maybe just tell us what they do, because these are a bit of a known necessity, they're a big influence in the funds world, but I'm not sure it's very clear to many people what it is they're really doing.

SPEAKER_00 0:32

Yeah, absolutely. And I think people are very familiar often with what an investment manager or portfolio manager does. They, you know, manage a portfolio, they run money. But when we talk about host ACDs, so authorised corporate directors in the UK, or host management companies, so the management company of uh let's say USICS in the EU, what we mean is the company, the entity that is responsible for the investment management, the marketing and the administration of the fund. So they're kind of the central service provider, if you like, for the fund that is appointed by the fund, and then in turn delegate certain activities like administration or the actual portfolio management to service providers.

SPEAKER_01 1:18

So it's a it's uh an interesting dynamic, isn't it? Because usually it's the portfolio manager, the investment manager who comes up with the idea, they've got the experience, the track record, they've probably run the distribution, they've got the brand, but actually they're the ones having the investment management delegated to, despite being the firm that chooses which manco or ACD to partner with.

SPEAKER_00 1:40

That's right. So you you're a portfolio manager, you've got the investment idea that you want to take to the wider world, as you say, and you do that by finding a host ACD or host management company, setting up the fund, the fund structure is set up, the host management company or ACD is appointed, and then uh it's almost like the tail wagging the dog really, isn't it? You're then appointed as the portfolio manager for the fund that you've come up with the idea of creating. But they're really this central kind of entity, and it's a central entity for many reasons, not least of which because regulators hook lots of responsibilities onto the ACD or the management company to perform these critical functions for the fund.

SPEAKER_01 2:22

So, a real core function, you can't have a fund really without one. You can't, and so why do we not hear more about what they do or how you choose or um what the pros and cons are of different different versions?

SPEAKER_00 2:38

I guess you don't hear more about them because they're not really brands that are in the marketplace as that that an investor will be buying when they subscribe to an investment fund. If you see a new fund, you're typically going to hear about it from you know, maybe an advisor or you'll see it on a platform, and you will probably recognise the the name of the portfolio manager, maybe, or the the brand of the kind of the investment manager, but you won't automatically think about the brand of the the management company, the the person that will be listed on every single regulatory document, actually, very early on. So you're because you're buying the investment expertise, the name, the performance track record, or whatever it may be of the portfolio manager, not of this core service provider, if you like.

SPEAKER_01 3:26

So that so their brand is not particularly visible. You could argue that their brand isn't particularly important in terms of your ability to distribute and sell your fund, but on the downside, if their brand does have something about it that becomes particularly negative, then it can really be a bit of a drag, can't it?

SPEAKER_00 3:48

It can absolutely, because if you think about what this this management company is responsible for, they're responsible for all of the things that make the fund actually work. All of the administration, the operations, all of the things other than actually the running of the of the money, they're central to. And so there's a lot of reputational risk there, I think, um, for you. And you know, if you pick the wrong one, it doesn't matter how good your investment performance is. You know, if nobody is answering an email from your investor or picking up the phone or administering or operating the fund well, well, you know, what's the point of having this great investment performance if you can't actually deliver the products and the service to your investors? Yeah, yeah.

SPEAKER_01 4:30

So when it comes to um I guess existing funds will already have an ACD or a manco. Um, new ones that want to come to the market are going to have to find one. That brings with it a selection process. And I wonder what your thoughts are on how those selection processes can run, or what is it that people do, or just where do you even where do you even start? Because you've helped some firms uh go through some of this.

SPEAKER_00 4:59

Yeah, I mean, and and it's like with picking any service provider, or actually, you know, buying a product from from anywhere on the market. You're you're interested in you know the quality of that product, you're interested in who's who's made it, you're also interested in what their expertise and specialism is. And you know, some host ACDs and host management companies are very familiar with certain types of funds, maybe you know, real estate funds, or they're particularly familiar with retail funds or whatever it may be. And then there are some very, very big providers out there that service very large funds and equally some very small providers. So, what's the quality of the of the service that you're gonna get? And that's gonna be driven by lots of different factors, including, to be frank, Wayne, how important you are as a client to that company. You know, are you a a small fish in a very big pond or a big fish in a very small pond? And that will determine the level of service that you'll be getting from the management company, and then you know whether they're even expert expert enough to be able to be supporting you in the way that you want to.

SPEAKER_01 6:03

Yeah, yeah. So the um the type of firm that you want to pick, firstly, you're only really going to draw out which is the best one by making some kind of comparison across the market. Um but then what I've seen is that sometimes those comparisons can be quite deep dives, they can be very broad, they can bring every provider, of which they're not a huge number, you know, there's probably five to six main ones in Europe, isn't there? Um in in the UK, sorry, and then maybe slightly more again in in Europe, but they can be very, very broad, very deep. It becomes uh a real cottage industry, and it can take months and months and months, be quite difficult to work out what to do, um, uh who to who to select and who to go with ultimately. But from from your perspective, and I can talk to some of the ones I've done as well afterwards, what what are the kind of critical things like what are the real difference makers in amongst all of those enormous uh RFP processes that can end up happening sometimes?

SPEAKER_00 6:59

So, firstly, who who's the company already servicing? You know, are they servicing funds that are distributing in a similar market to the to your target market? Are they servicing funds in jurisdictions that you're seeking to be in? Um, what's the the quality of the that they're offering, what's their their expertise? Um I'm sure we're going to come and talk about price as well in in a moment, um, but also what is their business model and what's their revenue model? A lot of host um management companies or host ACDs. Um, the ACD and the management company service is often part of a suite of broader services. So one of the uh selection criteria is how important is this as a service to the overall business? Is it something that the firm will run at a loss leader potentially because they're seeking to attract new business and then will you know generate actually the revenue from other add-on services, or is this a core part of their offering that maybe is going to be more expensive but is more critical to their to their business operations? And so I think means that they're gonna then gonna be more um more focused on delivering the service. So there's a whole kind of proposition, both jurisdictional and their service offering. Um, who who owns them? Um that's an interesting um function. Are they independent or are they part of a of another financial services group? So these are all factors that I think you should weigh up in thinking about um the sort of company that you want and the sort of companies that you'll be considering.

SPEAKER_01 8:32

Yeah, yeah. So from what I've seen, the the most important part of this process is um firstly what funds are you launching and who can support that? That's an obvious one. Um but then it comes down to what uh what sort of firm is it that's gonna work best with you, your business, your culture of your business, and your intentions for growth and your strategy. So you may be very small, you may have um turned things under the way that mean you're gonna grow very rapidly and you've got you know good sight of that rapid growth coming, you're gonna have lots of new products coming down the track, lots of different um structural improvements to existing funds, different share classes, hedging, all kinds of stuff that could be doing. If you've got that, then that potentially means that you're looking for something slightly different to a firm that's reasonably small in the context industry, quite niche, doing something very specialist, isn't going to be launching 10 new funds in the next two years, is going to very much focus and double down on that one piece of business and is uh is a smaller portfolio manager.

SPEAKER_00 9:39

And uh, there's two other elements you picked up on on one already, which is the culture of the firm. And that can mean many different things, but for me at least, it means how progressive is is the firm? Are they are they you know uh very used to how they operate, or are they being a bit more dynamic in thinking about how they can change their operations? And increasingly, this is a question around the use of technology as well. So, how can that support if you're a uh an investment manager that's very used to technology, used to that, you know, do you want some alignment there with a management company or ACD that's gonna also be using technology in an effective way? And that can be to improve efficiencies, reduce cost, increase speed. So there's lots of considerations there to really match and pair where you are and where the service provider is.

SPEAKER_01 10:29

Yeah, yeah, and the um we talked about price earlier as well, and or you you you mentioned that that we cover it. The price is like a real key bit, but sometimes I think price can be focused on a little too soon in the process. Now, obviously, this depends on the size of firm that you are. The very, very large firms clearly have way more influence over price, they can negotiate better prices than the smaller ones, but nonetheless, I think finding the right kind of provider and knowing what that is to you is probably the first most important point. The price is the second most important point, especially when you are going out to market and there's a negotiation there to be had.

SPEAKER_00 11:11

And I think you really pay for what you get here, in that if you are looking for a very cheap price and you're paying a very low cost, you know, what's the impact in terms of the service level? Um, how much resource has the firm got to be able to respond as quickly as you'd like them to when there are problems? You know, so I think that is a it's sort of a critical consideration. Um, economies of scale are important. Sure, bigger firms are going to be able to leverage their scale and in theory reduce costs. That comes to what's the quality of the service that you get as a small client, as a medium-sized client, as a large client of that firm, and that will vary considerably because you'll either be important or you won't be important to that to that firm, or maybe they treat all clients with the same level of importance. Again, is there a cultural kind of issue there as well as the commercial component?

SPEAKER_01 12:02

Yeah, yeah. So hearing from others is probably quite a good steer. Other client referrals is an important point to get uh to get a feel for that that cultural bit, but also just a service. Yeah, you know, maybe maybe they all treat their clients equally poorly as well as equally well, but maybe the clients are happy with that because they don't do anything other than just normal business as usual, nothing ever changes, no strategic differences, no fun launches, nothing happening at all. So I'm I'm paying a very cheap price. I'm getting a very basic service, but that's that's all that I really need. Why would I why would I do different to that?

SPEAKER_00 12:35

Um the other couple of of considerations for for me at least is you know, this is a constantly evolving landscape. Take regulation, for example. You know, so what support does the third-party management company or host ACD provide you when there's a regulatory change? Do they just email you and say you need to deal with this? The SEA has changed the rules, or the Central Bank of Ireland has changed the rules, let us know when you're done. Or do they support you in that? Do they provide information on that? Do they provide you know assistance with you? Are they on top of regulatory change projects or are they rushing at the very last minute um to maintain compliance? That's a really important consideration as well. So it's not just about the now, it's about the if we're we're you're achieving the growth that you're looking for in a UM as a as a fund and a fund manager, will the host ACD or the management company come with you on that journey going forward?

SPEAKER_01 13:30

Yeah, yeah. And another another point on a similar in a similar vein, I guess, is um knowing what your plans are and what you what your your wider business does for certainly for some for some larger firms, particularly looking at moving ACD or Manco or doing a review of the market, whatever that might be, um, or unitising for the first time with one, then you may have some quite strong links with particular custody banks, is a good one who will also often do administration for you, and middle office, front office. If you've got those strong links, then what you perhaps don't want to do is to partner with a Manco or an ACD that doesn't have links with the same firms because they are setting up two different work streams for different products, even though actually what your client sees is the same thing, it's a fund in one guise and a and a model in the other.

SPEAKER_00 14:21

Yeah, and I think I mean the point uh there is that there were really very different considerations for a fund that's setting up for the first time and appointing an ACD or a management company versus one that's transitioning, and all of those considerations around not just transitioning the management company, but as you say, the service providers that you've got relationships with understand you, and to some extent you have some confidence in their capability to be able to support you now and going forward. Um, is your distribution strategy going to mean you're going to move from distributing in one or two countries to 20 countries? And and can the management company support that? Have they got the passporting rights to do that? Or is every country you're waiting on them to submit a notification to the regulators to get the right for you to then, you know, so there's some speed to market issues there as well to consider.

SPEAKER_01 15:14

Yeah, yeah. So we've talked about the the um importance of it, despite it not having the brand. So those ACDs, those mancos play a crucial role, they will really dictate what your costs and charges are because not just the cost of them themselves, but they also will negotiate the fees with depositories, with custodians, with fund administrators, with transfer agents, and bring that back to you in a full package. So there's a there's a um a big piece of work that they do on that, a big effect they have on your fund in that respect. But also just how you work with them and how they can support your growth uh is is crucial because if you don't pick the right partner, then your entire business is going to be like running through syrup.

SPEAKER_00 15:58

Absolutely, you know, they it it's as you know, we started with it's it's surprising how critical these are as the service provider, and yet you know they're almost uh uh off the radar from a brand perspective. Yeah, yeah. So are they all the same? They're not all the same, absolutely. If anything, it's probably there's not two that are that are similar, uh for for sure.

SPEAKER_01 16:18

Yeah, yeah. So um as we say, the the the process of choosing an A C D, of choosing a manco today, I find is a big, lengthy, deep process of RFP each time, which is not necessarily the best use of time. The best use of time is determining what you want, what's important to you, and then very quickly probably reducing down the number of options on that basis, and then yes, spending time on um reviewing something that they tell you about themselves, but they're a business like any other, they're a commercial enterprise, they will give you the best messaging, right? They will sell you what it is that's good about them, and so really where you start to learn the most is by getting at a latter stage someone like us who've who've been in that sector for a long time and know the right questions to ask, and can scratch the surface a little bit, so make the introductions, host the meetings so that you can learn about them as people and what they'll be like to deal with, and drill into some of the responses. You talk about technology, every one of them will tell you that we're big on technology, but then how deep do you need to dig until you realise that technology to some means we use macros on Excel spreadsheets, and to others means they've got some very large proprietary software.

SPEAKER_00 17:41

Absolutely. I mean it's about being efficient with with your time, and as a portfolio manager or investment manager, you want to spend time doing the thing that you're good at, which is running money, developing products, you know, not doing RFPs on 20 host management companies when actually with the work that you're describing that you would do to really narrow down and zoom in on what you're after, you would you're gonna need to do a quarter of those RFPs and ask focus questions. It's a quicker process and actually a process I think that will get you to a better outcome.

SPEAKER_01 18:11

Yeah, yeah, good. Thank you. So, in summary, they're not all the same. They're not all the same, but there's work to do, however, don't be put off by the amount of work because it's traditionally been quite a large amount, it doesn't need to be quite that big because we can use tech ourselves to shorten it. Great. Good to talk to you about it. Thank you. Thank you. And we'll be back next time for the next podcast.