When conducting business on a day-to-day basis, fund managers incur expenses that are then paid on behalf of investors in the funds they manage. Although a somewhat sensitive matter due to the fact that it’s not always clear whether an expense should be billed, managers will sometimes send them through if permitted by the fund covenants.
In an effort to remove any discretion and increase transparency throughout the process, managers are required to maintain a clearly defined expense allocation policy. However, if these policies are not strictly observed, checks are not put in place and people within the firm are given discretionary powers, managers can find themselves in serious situations that are difficult to rectify.
In fact, some of the largest asset managers have recently found themselves in hot water due to the actions of rogue employees that submit false expenses and charge them to funds for their own personal benefit. Since this is a major breach of fiduciary duties, managers not only face the repercussions of having to pay millions of dollars in hefty fines, but also a damaged reputation when the situation is eventually unearthed and publicized.
As a result, firms’ expense allocation policies then come under scrutiny for letting their employees to easily mishandle expenses without being noticed. Although this sheds light on the fact that even the best policies are possible to bypass at times, firms can avoid these situations by implementing comprehensive and automated solutions that help to define restrictions and force employees to abide by the strict rules set forth in their policy. A few examples of these rules include:
- Certain expense types cannot be billed to funds
- Expenses beyond a certain limit must be submitted for review
- Expenses from certain vendors must be sent to specific funds or management companies
- Names of the people present for meals, parties or entertainment must be provided for related expenses
This is only a partial list of potential rules that can make up a firm’s expense allocation policy, but the idea is that this level of setup will minimize the chance of any wrongdoings and unintentional errors. When built with careful planning, expense allocation policies that are backed by automation can help managers avoid scenarios like the aforementioned while significantly improving both accuracy and efficiency throughout their entire process.
Learn more about IVP Expense Manager here.