Managing the risks associated with transitioning service providers

Best practice expertise and processes from successful mutual fund service conversions.

By Bob Kern, retired executive vice president, U.S. Bancorp Fund Services

In business and finance, transitioning services from one provider to another always involves a certain amount of risk. Data integrity must be maintained, service disruption avoided, compliance and reporting regulations met and numerous other hazards sidestepped. Whether a conversion is large or small, effecting it successfully takes confidence, preparation and expertise.

One of the riskiest and most complex service transitions in finance occurs when switching mutual fund service providers. Because of the comprehensiveness and highly regulated nature of these transitions, they can serve as a perfect example for examining best practices and processes. Principles for smoothly moving these services can be applied to a wide variety of other conversions.

This article will present a number of considerations for transitioning mutual fund services, with insight regarding planning, implementation and risk management. The methodology it includes should provide you with practical, useful takeaways you can use for mutual fund or other types of service transitions.


Service conversion risks defined

When transitioning mutual fund services from one provider to another, pressure falls on everyone involved to ensure its success. The investment manager and fund board must trust the reliability and expertise of the successor service. The successor service provider must own and manage the entire process with minimal impact to fund operations and investor servicing. And ultimately, the mutual fund trustees and chief compliance officer must face accountability for the risks and rewards of the transition. Some of the risks that must be taken into consideration include the following:

  • Data integrity
  • Fund complex reputational risk
  • Investor services disruption
  • NAV accuracy
  • Portfolio compliance
  • Pending portfolio, investor transactions, financial reporting

Service conversion methodology

A successful conversion of mutual fund services depends entirely upon the thoughtful, careful planning and expertise of your successor service team and a dedicated project manager. In addition to having significant experience converting similar funds and services, you should consider the tenure of the conversion team and conversion management methodology employed by the service provider. A well-established conversion program will use a project management methodology to coordinate the significant number of concurrent conversion tasks and interdependencies involved in major conversions occurring in generally a short 120-180 day time frame.


Service implementation planning

The fund sponsor and fund board should be aware of two distinct aspects of their service migration – service implementation process distinct from the data conversion. The conversion of investor and portfolio data is only a part of the service implementation, which includes many other items, such as building your service team, communication protocols, establishing ongoing service performance measurement and reporting, daily reporting data and delivery. Key components of the project management process include the following critical items to ensure successful service implementation:


 Service implementation plan

The successor administrator owns the service conversion process and will create a conversion plan document to cover all project management office items:

  • Conversion contact list – All individuals, contact details, escalation protocol for each task.
  • Detailed task list with milestones – Conversion tasks, dependencies, specific task owner and associated task deadline(s).
  • Communication plan – Key contacts at each service provider and fund complex, including a plan for regular formal conversion dialogue regarding plan expectations, task progress against goal, dates and issue resolution.
  • Customer segment notification – The plan should include both consideration and potential involvement of all customer segments within the mutual fund complex:
    • Investors
    • Intermediary firms
    • Trading firms
    • Fund adviser
    • Sub-advisers
    • Independent audit firm
    • Fund board
    • Fund officers
    • Fund CCO

Service requirements definition

One of the most critical success criteria for each implementation is the discovery, validation and documentation of service goals and objectives required of each of the above customer segments – each of these parties has specific, unique requirements that must be included in the implementation plan. In order to meet these goals, the service provider should drive the process to identify and document the target service model regarding such items as investor services, communications, customization, reporting, board communications and compliance.


Data conversion

A fund accounting conversion will typically entail conversion of security masters, tax lots, income/expense accruals and capital stock, with parallel NAV processing for one to two weeks. The transfer agent conversion will generally entail a conversion point, typically a weekend, with planned one to two mock conversions and associated remediation from each “dry run.” Both investor and portfolio data files are required early in the process to analyze the source data, map to successor systems, validate data and plan the process, including signoff by both parties.


Service implementation validation

Throughout the four-to-six-month service implementation process, the successor service provider will continually validate the service and conversion requirements as well as task goals, to confirm the target service environment. Audit processes should be built into each conversion task to identify exceptions and confirm success.


Service conversion risk considerations

The table below outlines some of the critical risk areas when converting mutual fund accounting, administration, shareholder services, custody and distributor services.


Mutual fund service conversion potential areas for risk consideration
Risk mitigation measure
Fund administration and fund accounting services

•  Portfolio securities reconciliation

•  Income/expense accrual reconciliation

•  Portfolio transactions and financial reporting pending over conversion date

•  Reconciliation with custodian, transfer agent

•  Portfolio compliance

•  Secure (proxy) asset list early in project; automate exception process

•  Securities accounting validation/expertise

•  Identify/plan/account for pending transactions, financial statements

•  Planned coordination of exception process

•  Audit all data received and prior compliance testing process/reporting; validate compliance with RIC SEC, IRC, prospectus, SAI at conversion

Custody services

•  Pending trade settlement over conversion

•  Income collection over conversion

•  Foreign market setup timing

•  Collateral management/RIC compliance conversion

•  Plan for/identify/account for pending settlements, corporate actions

•  Identify securities/income source and track/account for pending receipt

•  Complete country setup documentation early in process (two to three months)

•  Security/credit/collateral identification and segregation prior to conversion

Transfer agent and shareholder services

•  Pending NSCC trades over conversion

•  Intermediary platform trade support

•  Contact center preparedness

•  Shareholder services compliance; timely, accurate notification

•  Investor tax reporting for year of conversion

•  Plan for/identify/adjust for pending NSCC trade/cash settlements

•  Intermediary communication and NSCC testing

•  Early contact center participation; training close to conversion date

•  Audit all data received; validate data vs prospectus, SAI, fund sponsor and customer segment service requirements

•  Successor firm coordination of specific responsibilities by specific parties to provide investor tax reporting

Distribution services

•  Dealer agreement conversion

•  Timely sales literature review/revision

•  Early identification/communication with each intermediary for repapering

•  Inventory all fund materials/Web pages; compliance review



The ultimate success of a conversion of billions of dollars of mutual fund assets and hundreds of thousands of investor accounts depends on the expertise of the successor service team. This expertise drives the successful project management process, all stakeholder requirements analysis, the audit of data and processes, and the validation of service implementation results. The conversion team talent and project management process minimizes inherent process, exception, financial, operational and reputational risks associated with large service implementations.

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Bob Kern worked for U.S. Bank from 1982 to 2018. In his most recent role before retiring, he managed global business development efforts of mutual fund, exchange-traded fund and alternative investment product services in the U.S. and Europe.