Investment Fund Best Practices, Part One
Identifying Advisors That Support You Throughout Your Fund Lifecycle
Managers new to the game tend to underestimate how much time and effort is required to start and run a business. Seasoned fund managers understand the reality of having to wear many hats on any given day. Whether you’re new or seasoned, it’s common to become overwhelmed by the plethora of responsibilities that come along with running an investment advisory firm including, people management, networking and fundraising, regulatory compliance, service provider management, investor relations and financial reporting. That’s why one of the most important decisions for a fund manager is determining who to partner with for audit and tax, to make your life a little easier as you need guidance, resources and efficiencies throughout your fund lifecycle.
When you are launching a fund or thinking about switching service providers, understanding the right questions to ask is a valuable way to identify the audit and tax team that would best compliment your strengths and service your needs.
Getting to Know the Players
The obvious place to start is to ask your peers, industry friends and other industry-related service providers. These common questions determine if their recommendations might be a good fit for you:
- Who is their current CPA firm and how long have they worked together?
- What do they love most about working with their current audit and tax advisors?
- How proactive and helpful has the firm been on the audit process or tax planning issues?
- What is the reputation of the firm in the marketplace?
- How do they think the CPA firm will work with your firm, fund strategy and size, and investor base?
While reputation and brand are important factors, here are some other questions to get a better sense of what it would be like working with that CPA firm:
- How well did the audit and tax engagement team service their account?
- What has it been like working with the firm from launch to now?
- Did they have access to the audit/tax partner on the engagement?
- How responsive was the team in getting back to them on questions or concerns?
- Did the firm effectively execute interim and year-end procedures and meet audit and tax deadlines?
- Did they meet or exceed expectations? Why or why not?
- Were the fees fair based on the services received? Any unexpected billing surprises?
- Would they refer the audit or tax team to another colleague?
- Was the firm proactive in communicating regulatory updates and identifying opportunities?
- How else has the firm added value or been able to support them outside of audit and tax that’s been helpful to the internal team, the business and/or the fund?
Understanding the Service
Before you make a shortlist of potential audit/tax firms, it would be helpful to determine what is important to you as it relates to the “Top 3 Considerations” for the annual audit and tax return preparation, including the Schedule K-1:
Price – What is the annual cost for the audit and tax return preparation relative to your assets under management? How do the types of investments, strategy and investor base impact pricing for tax services? What fee increases should you expect year over year? Are there any additional costs you should expect to be added on at year-end that are stated or not clearly stated in the engagement letter? What type of issues or out of scope work would cause you to incur additional fees? How and when are additional fee increases communicated to management? Will they bill you anytime you pick up the phone to ask an audit/tax question?
Quality – Most firms may not care much about quality until they find themselves spending more time in the audit and tax compliance process because they are working with an inexperienced engagement team or unless the regulators find a material error. When the CPA firm or engagement team is unfamiliar with your strategy or industry, you waste time training staff and have a greater risk for errors. You may also experience more turnover on your engagement team year over year since accounting firms often place their most skilled people and resources on the highest profile opportunities, meaning their larger and/or more profitable clients. Quality and technical expertise matters for Schedules K-1 and tax return reporting because any inaccuracies on the K-1s will cause issues for your LPs and their tax advisors, which will result in challenges for your investor relations team and/or beneficial first year elections if applicable. LPs and their advisors typically do not appreciate having to track down information that should have been included originally in the K-1s. Reporting and tax inaccuracies can also reflect poorly on you and your team. Depending on your fund structure, not having the right tax advisor could result in additional tax leakage or significant penalties if requisite reporting obligations are not made. Therefore, it’s important to work with advisors that understand the nuances of your strategy and industry so they can help you plan ahead for issues that are likely to arise in your business.
Timing – When talking to CPA firms, you can ask about their scheduling process to understand when you might have information requests, planning discussions and document reviews. Some investors have expectations for financial statements or tax returns that precede the regulatory deadlines, so you should confirm that the CPA firm has experience meeting those earlier deadlines since proactive communication with your accounting team or administration firm would be required. Funds may typically expect to receive Schedules K-1 sometime during the first quarter of the year, from early February through the end of March. Audits fall within the same timeline except you may receive them anytime up to April 30th to comply with respective SEC and state registration deadlines.
Determining the Needs of You and Your Investors
Now that you understand the Top Three Considerations, consider the following questions to determine which considerations might be most important to you:
- How much experience do you have starting a business or running a fund?
- How much handholding do you require?
- If you require more handholding and guidance from your audit & tax advisors, how much is that additional time worth to you?
- Does the firm you are considering have the resources and capability to help you within the confines of your budget?
- Do you have the bandwidth to handle all of the monthly and annual financial reporting requirements of the fund?
- Will you have an in-house or outsourced CFO/COO oversee the audit & tax process?
- Who does the audit firm predominately cater to: large institutional funds, mid-tier funds, emerging managers, or start-ups?
- How many funds do the team and office currently service? Try to get a sense if they are knowledgeable and staffed appropriately to execute as promised. Ask to meet the team.
- What is the firm’s experience and depth of bench locally and nationally?
- What is the engagement team’s experience from partner through associate level? How involved are the manager and partner on the engagement?
- How many funds like yours have they worked on currently or in the past?
- How often does the engagement team turnover on average?
- How well do you think you and your team will work with the engagement team?
- What do you think about the firm’s experience, expertise and brand?
- Who is your investor base over the first 36 months (friends and family, ultra high net worth individuals or family offices, or institutional investors) and how will the CPA firm help you support those investors’ needs?
Often, the initial investor base for a new launch will be friends, family and high net worth individuals. These investors usually want strong value, meaning they want a strong product for the price. They also appreciate clean reporting and communication that are not overly complicated, which also means they do not want unnecessary errors that cost them extra money, frustration and time. If you are launching a fund with access to institutional money, those investors might perform more due diligence around reputation, track record, team size and expertise, data security, and similar client demographics.
Making the Decision
Once you have answers to the questions above, now determine which factors are most important to you as it relates to price, quality and timing because these scenarios are often how the three considerations work together:
- If price and timing are the most important factors, you may sacrifice quality
- If timing and quality are most important, you may have a higher price
- If price and quality are most important, you may experience longer timing on projects
Life is about choices and compromises. By asking some simple questions and determining up front what’s most important to you when working with your audit and tax advisors, you will have the opportunity for a smoother start to your new relationship, execution of year-end deliverables, and most importantly, establishing clear expectations between the management team, investors and your new audit/tax firm. Good luck with your selection process, and know that Weaver is here to help!
If you would like a complete checklist of what to consider when selecting your audit and tax firm, contact us today.