By Adam Pinkert
The rest of the world is still talking about the just-televised-football-game-that-cannot-be-mentioned-but-starts-with-S-and-ends-with-l. However, if you’re an alternative asset management firm, you've probably already moved on to thinking that it's time to get serious about 2016 K-1s. This perennial tax requirement can be quite the headache, with K-1s coming from every fund and needing to go to every investor account. Time is critical and mistakes are unacceptable. Every investment manager COO should be asking, “Is our CRM up to snuff?” Consider these four critical K-1 deliverables before you answer!
K-1 Deliverable #1: Know Your Investors … and Their Investments
Not only do your investors have unique situations that need to be accurately provided to your tax accountants, BUT individual investor accounts may also have attributes that can affect tax preparation. CRMs typically fail to optimally support K-1 preparation because they do not have the concept of investment accounts inherent in their code DNA. For example, a generic CRM may keep track of your firm’s investors, but it cannot differentiate between IRA, Trusts, or ERISA accounts – each of which may possess unique K-1 ramifications. Consequently, because generic CRMs do not understand the multitude of tax situations that can exist, they can cause unwelcome slowdowns in the time-sensitive K-1 process.
K-1 Deliverable #2: Determine Who Gets What
K-1s do not only go to investors. They may also need to be sent to a variety of other individuals, such as an investor’s tax accountant, financial advisor, family office manager, etc. Can your CRM understand custom rules that will ensure accurate distribution of K-1 forms? If not, then be prepared for additional delays while internal administration attempts to find their way through the potential pitfalls of validating distribution lists and processing documents.
K-1 Deliverable #3: Send K-1s Securely
The days of sending K-1s by mail are long gone. The SEC and FINRA have strict guidelines regarding the secure electronic distribution of K-1s. As most CRMs do not have tightly integrated secure portals, you will either need to send the K-1s in password-protected format via email, or employ the use of a portal that may not seamlessly integrate with your CRM.
K-1 Deliverable #4: Report Data for Estimated Taxes
Because of the complexity of the K-1 process, many investors pay estimated taxes for April 15th and request an extension for complete filing. However, most CRMs lack the tools to provide investors with capital gains, depreciation, or transaction data they may need to self-estimate their tax liability. Only specialized systems built for the alternative investment community have the account, transaction, and fund data necessary to provide this important service for your investors.
So, is your CRM up to the task now that K-1 time is upon us? In most cases, the answer is “no.” Standalone generic CRMs are simply not designed to track investment account data and enable your firm to support world class investor relations. A more holistic solution is called for – one that incorporates an understanding of both investors and investment accounts, while agile enough to help streamline your operations. Contact us at Backstop if you’d like to discuss a CRM for your alternative investment firm that encompasses the whole of your capital raising, investor servicing, investor reporting, and capital retention needs.