T here is more variety and competition among investment funds than ever before. Investors have a myriad of options to choose from given any reason to consider investing in an alternative to your funds. Issues with investor relations, administration, accounting or deliverables can leave an impression in the eyes of investors that inform any decision to reinvest or refer others to your fund.

Consistency, accuracy and professionalism are key. Controls throughout the back-office process are crucial to providing the investor experience that you want. Establishing controls around the investor relations process is essential to the real and perceived stability of your fund. Failure to prioritize excellence in investor relations and to adhere to controls that ensure that excellence represents a significant business risk with the potential to jeopardize ongoing fund raising.

Many investment funds that outsource investor relations processes are frustrated by providers who continually commit errors, omissions and miscalculations in processing investor data. By the time these errors have broken the fund sponsor’s relationship with the provider and a decision is made to move, fund management has been frustrated and distracted from core functions and investor and advisor confidence in the stability of the fund has been shaken. Fund management now has to embark on the painstaking and time-consuming process of transferring the fund’s asset and investor data to the processing systems of a new service provider.

A concerned Investor looks at his computer.

Points of Failure in Investor Relations

In investor relations day-to-day processes, a variety of errors and omissions are possible. They have the potential to be damaging to the reputation of the fund as well as financially costly. One or more of three factors is usually involved in back-office processing failures:

  • Systems – investor relations systems that are not capable of tracking activity, calculating accurately and communicating effectively with investors, advisors and fund management
  • Controls – insufficient internal controls in the investor relations process to prevent input errors, transmission errors and other missteps and are inadequate to prove output effectively
  • Communication – a lack of coordinated communication by the teams involved in various investor relations tasks as they process different functions relying on overlapping data sets

Investor relations are critical to the life of a fund. The processing and archiving of an enormous amount of data is involved. Investors and fund managers rely on the output of the investor relations team for essential decision-making. Every participant in the fund’s ecosystem must have confidence in the accuracy and consistency of the reporting and other output of the investor relations team.

Inexperienced investor relations teams or those with dated or ad hoc systems and tools tend to accumulate and compound errors when working with data concerning millions of dollars in assets and hundreds or thousands of investors. If an investor relations group relies on multiple systems not specialized for fund administration processes, perform calculations and other investor relations processes in Excel spreadsheets or manipulate data manually outside the system of record errors are inevitable. Investor confidence will naturally suffer. Back-office frustrations are always a consideration when investors consider reinvesting with a sponsor or recommending that sponsor’s investment to others.

Controls in the Investor Relations Process

Most investor relations systems lack built-in investor compliance functionality. Compliance checks performed manually for AML, KYC and OFAC requirements, for example, represents an unacceptable regulatory risk to the fund due to the element of human error.

Ineffective intercommunication among fund accounting teams, tax groups and investor relations in an operational environment with inadequate controls mean ongoing mistakes and issues in any number of areas.

  • Repeated mistakes in new investment entry
  • Delays or reissues of capital calls
  • Mishandled proxy voting
  • Inaccurate or untimely distributions
  • Miscommunication with investors
  • Late tax document delivery

Checks and balances to ensure that investor relations functions are performed appropriately and that computations are correct must be in place on both a systems and workflow level in investor relations operations. Proofing and review-and-approval procedures must be in place to ensure correctness as well as programmed controls within systems to prevent errors and to identify any inconsistencies. If not specifically designed for the tasks they are to perform, ad hoc investor relations systems force users to conduct tasks manually or rely on unstructured data in spreadsheets and PDFs that are challenging to query. Because there are no system controls to detect and track the inaccuracies, investor relations teams may be ignorant of data discrepancies or omissions. Teams utilizing subpar systems are probably not equipped with the knowledge or resources to identify mistakes when they happen.

A woman and her team work at their cubicles.

Audit trails within systems that track data inputs, changes and approvals in the investor relations workflow make it possible to spot known errors and remedy any ineffective processing procedures. Without audit trails as a means of monitoring and correcting performance, the same processing errors will be repeated over and over again.

The lack of effective controls in place in the investor relations processes carries the risk of many consequences. The fund may miss out on fees, distributions may need to be corrected and redistributed, erroneous tax documents may have to be reissued or essential private data may be transmitted to the wrong party. These can be the cause of embarrassment, regulatory scrutiny or even legal action against the fund.

Process controls are an important consideration in evaluating any investor relations firm. Proactive procedures must be established throughout the investor relations structure in order to guarantee accuracy, accountability and timely delivery of data to all parties concerned.