Trustee, auditor, administrator, dealer — who actually does what

The manager

The manager makes the investment decisions and runs the business. In a well-built structure this is all the manager does. It does not hold the assets, does not keep the register of who owns what, does not audit its own numbers and does not decide whether you are a suitable investor. Every one of those is given to somebody else, and the reason is not politeness. It is that a manager who does all five can produce any picture it likes and nobody can contradict it.

The trustee

A trust is a legal arrangement in which one party holds property for the benefit of others, and somebody has to be that party. The trustee holds the assets. Where the trustee is a federally regulated trust company, it has its own capital requirements, its own regulator and its own liability, and it is not going to lose those things to accommodate a manager. The test to apply: if the manager's business failed tomorrow, whose name is on the assets? If the answer is the manager's, the separation was decorative.

The auditor

An auditor gives an opinion on whether the financial statements present fairly, in all material respects, the financial position of the fund. Note the words carefully, because they are narrower than people assume. An audit is not an opinion that the investment is good, that the strategy will work, or that any return will be achieved. What it does give you is that the annual financial statements have been examined by an outside firm which put its name to them. Be precise about the limit of that: an audit does not verify the net asset value your units were priced at during the year, and in a property fund the value of the real estate is an estimate made by management — usually supported by third-party appraisals and tested by the auditor for reasonableness, but an estimate all the same. Ask who prepared the appraisals, how often, and whether the appraiser is independent of the manager.

The fund administrator

The administrator keeps the books: the register of unitholders, the calculation of net asset value, the processing of subscriptions and redemptions, and the statements and tax slips you receive. The point is the same as the trustee's. The record of what you own is not kept by the people who sold it to you. If the manager and the administrator disagreed about your unit count there would be two independent sets of books to reconcile, rather than one assertion against nothing.

The registered dealer

In Canada you cannot generally sell securities to the public without registration. In the exempt market the dealer is usually an exempt market dealer, and its obligations are real ones: know the client, know the product, and determine that the investment is suitable before accepting the order. If the dealer concludes it is not suitable for you, the subscription does not proceed — and that is the system working, not failing. A manager that is not registered may not perform this function and may not substitute its own judgement for the dealer's.

Legal counsel

Counsel drafts the offering documents: the exemption relied on in your province, the resale restrictions, the statutory rights of action and the risk factors. One thing worth saying plainly, because people read a well-known firm's name as protection: counsel to the issuer is not counsel to you. That is how every offering works, and it is why you are entitled to take your own advice.

The registered plan trustee

If you hold an investment inside an RRSP, TFSA, FHSA or RESP, the plan itself is a trust and somebody must be its trustee. For exempt-market securities this is usually a specialist trust company. It is also why a registered subscription takes weeks rather than days — your existing institution has to transfer the funds and the plan trustee has to accept the security into the plan, each with their own paperwork.

How to use this when you are looking at any fund

Ask for the names. All of them, in writing, before you invest anything. Then look each one up independently rather than through the manager's website. A structure with a real trustee, a real auditor, a real administrator and a real registered dealer is considerably harder to abuse than one where the manager does all four, because several independent organisations hold records that would have to be reconciled. It is not proof against fraud, and it would be dishonest to say it were: each of them works from information the manager supplies, and the failures that have actually happened in the Canadian exempt market have generally involved inflated property valuations and undisclosed related-party dealings rather than a conspiracy among service providers. What it does mean is that a structure where the manager holds the money, keeps the records and prepares its own statements has nothing standing in the way at all.