Common Mistakes In Investor Relations

Learn the reasons for the mistakes third-party investor relations providers make that can cost you time, money and investors.


Investor Relations Errors Have Consequences

Investors have more investment opportunities than ever before. They are not bound to a single fund family for the rest of their lives. Investors may jump ship if problems with investor relations, fund administration, accounting or reporting arise. Stability is important for investors. Controls, synergies and collaborations must be prioritized by fund sponsors to give investors the assurance they need. By concentrating on investor relations, fund management makes a strong business investment in the stability of the fund. By not taking the time to prioritize excellence in investor-facing activities fund management puts a lot on the line: money, reputation and future business.

At Phoenix American, we encounter investment funds frustrated by investor relations providers who make a variety of errors, omissions and miscalculations on an ongoing basis. By the time these errors have permanently soured the fund sponsor’s relationship with the investor relations provider, fund management has been irritated and distracted, investor and advisor confidence in the fund’s stability has been shaken and fund management has had to embark on the difficult and time-consuming process of converting asset and investor data to the systems of a new service provider.

Points of Investor Relations Failure

In investor relations processes, a variety of mistakes and omissions are possible. These errors have the potential to be financially and reputationally disastrous. Failures are typically caused by one or more of three factors:

  • Systems – inadequate investor relations systems are incapable of the tracking, calculation and communication needs of the client fund
  • Controls – inadequate internal controls are unable to prevent new investment and other input errors and effectively proof output
  • Communication – a lack of effective communication among teams involved in investor relations as they process separate functions utilizing overlapping data sets

Investor relations is an important part of fund administration. It necessitates the processing and preservation of a large amount of data. Based on the reporting and other output of the investor relations team, investors and managers make data-driven decisions. All parties must have confidence in the quality and consistency of the information generated by investor relations and reported to them.

Inexperienced and under-equipped investor relations staff can easily accumulate blunders when working with millions of dollars and thousands of investors. If an investor relations group relies on several non-specialized systems as well as Excel spreadsheets and other manual processes to organize data and complete calculations, errors are almost inevitable, investor confidence suffers and this can be costly.

Inadequate Investor Relations Systems

Many funds and some investor relations providers use multiple systems not specialized for the back-office processes of investment funds to accomplish back-office tasks. These systems are not integrated and are often supplemented by Excel spreadsheets and other manual interventions. As a result, a host of investor relations failures and lost opportunities can occur:

  • Financial statements do not correspond to investor statements or portfolio accounting records.
  • The information on Form PF and the Fair and Accurate Credit Transactions Act (FACTA) filings are incorrect
  • The accounting data for the portfolio and the data in the investor relations system do not match.
  • The investor relations system does not assign entries to the relevant class level resulting in substantial NAV changes.
  • Accounting, reporting, administration and other systems that work well on their own are not integrated, resulting in data sets that are incorrect because the information is not in alignment.
  • The trial balances at the class and total levels may not match if the fund accounting system is not integrated with the transfer agent system.
  • Non-specialized, cobbled-together or ad hoc investor relations systems have architectural constraints that limit their efficiency, slow down processing or prevent them from managing complex and continuously changing data.
  • Investor relations systems that are unable to automate activities rely on error-prone external systems and human procedures.
  • Investor database systems that are not integrated with electronic subscription systems, industry sales platforms, data aggregators and other participants limit the visibility of the client fund and its ability to maximize sales.

An advanced investor relations system that is not only specialized for alternative funds but also user-friendly even for the least technologically savvy user, is essential to eliminate external manual activities. It must also include exception-based workflows to eliminate manual activities with the exception of a few specific scenarios which are subject to proofing stages and approval requirements.

Inadequate Controls in the Investor Relations Workflow

Many investor relations systems do not have compliance functionality built-in. Manual compliance for such requirements as AML, KYC, OFAC and FATCA subjects the fund to regulatory risk due to the potential for human error.

Intercommunication issues with fund accounting coupled with insufficient controls in investor-related procedures results in mistakes, delays or reissues of capital calls, proxies, distributions and tax documents.

Many funds lack the essential checks and balances in place in their investor relations operations to ensure that their functions and computations are correct. Often, there are no built-in proofing or review-and-approval procedures in place to ensure correctness.

The absence of audit trails that track data inputs and changes in the investor relations system makes it impossible to spot the source of known errors and remedy erroneous processing procedures.

If investor-related process controls are not in place, funds risk missing out on fees, making mistakes in investor distributions, producing erroneous tax documents and other errors representing serious business risk.

In order to ensure accuracy, accountability and process controls, proactive measures must be implemented throughout the investor relations structure.

Investor relations systems that are not specialized for the purpose force operators to perform work outside of the system, relying on hand computations or unstructured data in spreadsheets and PDFs that are difficult to query. Investor relations teams may be unaware of data discrepancies or omissions because no system controls exist to spot and track the errors. Teams, working with inadequate systems, likely lack the experience or the time to spot errors themselves when they occur.

Lack of Effective Communication

Because fund accounting, investor relations, tax processing, fund administration and financial reporting each have their own data sets, challenges arise when teams fail to interact properly. Due to a lack of communication among the various teams:

  • Management is unable to understand the bigger picture underlying the data from the investor database.
  • Investor relations teams are not aware of the downstream effects when they rely on certain data sets for investor relations processes.
  • The risk grows as communication breaks down within investor service organizations.

These mistakes may be readily prevented if personnel throughout the investor relations structure communicate effectively on a regular basis.

Even at major fund administration firms teams often operate in their own separate silos. Far-flung teams are based all over the world and some functions are outsourced. The potential for miscommunication and the known operational errors that result represents a significant business risk for client funds.

A Reputation for Investor Relations

There are numerous points in the process of investor relations operations when a lack of precision, automation and experience can result in embarrassing and costly blunders. In the eyes of investors, financial advisors and auditors, a fund’s reputation for investor service blunders reflects on the general competence of the fund sponsor. Advanced, experienced and integrated investor relations architecture is essential to the efficiency and positive reputation of a modern investment fund.

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