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As tax reporting season winds down, the pain and difficulties in getting out K-1s is still fresh in everyone’s mind. For some fund managers, though, what was once an inefficient and laborious process has been streamlined through the adoption of new technologies that provide a number of benefits beyond just getting tax documents out the door. Of course, sending out K-1s is only one part of a much larger effort to report to investors during the entire year.
It wasn’t too long ago that GPs had no choice but to send out K-1s in hard copy format – an expensive and cumbersome process. Then, in early 2012, the IRS ruled that partnerships could send K-1s electronically in place of hard copy, so long as consent from the LP was provided beforehand. And thus, GPs’ rejoiced at the ability to use email to send tax documents. However, it soon became apparent that using email was creating more problems than it was trying to solve.
The reality is, email as a reporting tool advances the investor reporting process by only a marginal amount. Even when working with a CRM, email has limitations, specifically when you need to attach different documents for different recipients. This is really where email as a reporting tool breaks down. Splitting a master document file into individual statements, saving and naming each one, attaching to individual emails – this is not a process that creates significant efficiency over sending physical hard copies. Not only that, but using email is prone to human error, with no checks or balances to ensure that a K-1 doesn’t go to the wrong person –something that not any GP or LP wants.
What a number of GPs are discovering however, is that using an investor portal to send documents like K-1s to investors can save significant time and effort. Using our own Investment Café Portal solution for example, a GP can automatically split a single, master file PDF into many, investor specific documents that automatically post to that investor’s relative portal. Investors simply get notified that a new document has been posted. In this way, there is no manual saving of individual PDFs, no creating and attaching to individual emails, and most importantly, no possibility of emailing the wrong document to the wrong investor.
A recent report by Private Equity International stated that 53% of private equity firms surveyed had experienced some kind of cyber-attack. In addition, Pensions and Investments magazine has recently reported that two third-party administrators have been hacked in the last six months. With the volume of sensitive information – social security numbers, bank account information, addresses, etc, – that PE managers and other service providers regularly communicate around, it’s no surprise they would be a prime target for cyber-criminal activity.
GP’s who are still using email or other non-secure communication tools are taking a significant risk by exposing their clients’ information to criminal entities. Email is not considered a secure communication mechanism and can be easily hacked due to a lack of encryption protocols. A secure investor portal solution removes the risks of sending sensitive information over unsecured channels like email.
According to IRS regulations, it is incumbent on the General Partner to ensure K-1s are delivered to their investors in a timely manner. Knowing who has accessed, and who has not accessed their K-1s is an important part of a thorough compliance program. This, of course, goes well beyond just tax documents to incorporate any type of GP-LP communication.
A sophisticated investor portal solution should provide a complete set of administrative reports for CFOs, compliance and IR personnel, to know who and when an end user clicked on or reviewed a document. In addition, such internal reporting can greatly assist in the audit function, should it be required down the line.
Take the view of an LP, and imagine a scenario where two of their fund managers use two separate methods to deliver fund information.
The first manager sends documents through email. The LP will click on the documents attached to the email, and save it to their hard drive, along with the numerous other documents this fund manager has previously sent. The LP must now organize and protect all these documents themselves, and hope that all their related parties(their accountant, lawyer, etc.) are also doing the same.
Alternately, the other manager uses a portal solution, neatly and securely organizing the necessary information for the LP. The secure data is now accessible to approved parties at any time, from any place, and the mentioned fund manager has effectively relieved the LP of their information management burden.
Is it surprising, then, that a recent report from Ernst & Young stated that 87% of investors would rather get their information from an Investor Portal than any other way?
Email is still the most common form of digital communication today. Most e knows how to use it and it is relatively inexpensive. However, email might not be as cost-effective as it might seem – potential hacks and mistakes from human error, coupled with the cost of inefficiencies can ultimately be very expensive for a fund manager.
Given that the investor community prefers to access their fund information through a portal solution, is it time to finally say goodbye to email as a reporting tool, and hello to the new era of investor portals?